Prosecutors and Internal Revenue Service (IRS) agents in the United States are investigating affluent crypto traders and hedge fund managers who may have received illegal tax and are fraudulently abusing Puerto Rico’s tax system.
Bloomberg reported on June 12 that investigators are currently developing civil and criminal cases against some hedge fund managers, cryptocurrency traders, and other wealthy Americans who may have lied about their residency and significant income components to unfairly benefit from tax breaks.
Tax Havens and Crypto Traders
Since 2012, Puerto Rico has provided American investors, hedge fund managers, and cryptocurrency traders substantial tax benefits. This legislation has allowed some investors to legally avoid paying federal income tax and no taxes on dividend, interest, and capital gains income.
To qualify under Puerto Rico’s tax policy, investors must maintain close local ties and reside on the island for at least 183 days per year. In addition, Bloomberg reports that since 2012, more than 5,000 Americans and 3,600 businesses have qualified for tax rebates.
Now, investigators scrutinize whether investors have been truthful about their island presence and income sources. Investigators and authorities have begun to realize that numerous individuals may be abusing the tax system.
At least two of these criminal investigations will result in charges soon. U.S. officials are also investigating the attorneys and accountants responsible for promoting the tax program for the island territory. Authorities are considering conspiracy and wire fraud allegations.
Puerto Rico Tax Law
Under Puerto Rico’s tax laws, individuals receive a 100 percent exemption on dividends, a 60 percent exemption on municipal taxes, and no federal tax on source income received there. Although the tax benefits are among the most generous in the world, rigorous eligibility requirements exist.
Peter Schiff, a gold investor, and Michael Terpin, a cryptocurrency trader, are two notable residents who moved to Puerto Rico for tax purposes. The 4th of July saw the shutdown of Schiff’s Bank by Puerto Rican regulators for failing to satisfy the net minimum capital requirements.
Bloomberg reports that while locals have opposed the initiative, American investors have benefited from the tax policy. Puerto Ricans assert that the strategy favors Americans and forces up the cost of real estate.
When locals protested the policy in 2022, allegations of a similar nature began to surface. Bloomberg’s most recent report included mention of such demonstrations.
