According to JJ Crespo of Zenith advisors, all assets purchased in a year where you fulfill BFR-PR year of the move exception requirements are PR-sourced, even if they are purchased before a move. this is also confirmed by sean king and Giovanni mendez, both respected CPAs and attorneys in PR, in a facebook group post:
Example 1) Bob moves to PR in June 2018. He applies for Act 22 in October 2018 and gets approved. Bob had purchased stock in August 2017, and sold it in December 2018. How are the capital gains allocated under Act 22?
Example 2) Fred moves to PR in February 2018. Fred purchased stock in January 2018 and sells in July 2018. He applies for Act 22 in October 2018 and gets approved. How are the capital gains allocated under Act 22?
Example 3) Jim had purchased crypto in August 2016. Jim moves to PR in June 2018. He applies for Act 22 in October 2018 and gets approved. Jim sold his holdings in March 2018. However, Jim’s Act 22 is backdated to Jan 1. Jim’s holdings were much larger on Jan 1 than the execution of the sale in March 2018. How would Jim elect to treat his gains/losses under 22?
From Sean King:
Okay, let’s take the first situation first. I’m assuming that Bob meets (or will meet) all the requirements to be deemed a bona fide resident of PR for all of 2018 under the IRS’s “year of the move” rules (see IRS Publication 570 for a summary of those rules). So, he’s a PR resident for the whole year despite not moving until June.
Next, we must decide where the gain on the sale of the stock gets sourced under the federal sourcing rules (also summarized in IRS Publication 570). Under those rules, gains on the sale of personal property (that is, everything other than real estate, inventory, etc.) are generally sourced to the taxpayer’s bona fide residence. However, there’s an exception to that rule for certain types of property, which generally includes stock. Assuming the stock falls under this exception to the general rule, then all gains on the sale of such stock realized within ten years of moving to PR must be sourced to (and taxed in) the US unless the taxpayer elects to allocate the gain between PR and the US in one of two prescribed manners (one applicable to marketable securities and the other applicable to everything else). You didn’t say whether the stock was publicly traded, but I’m guessing that it is, and so the allocation between pre and post move gains would have to be made (under the rules) based upon the respective fair market values of the stock at the date of move and the date of sale. In other words, the portion of the gain that accrued pre-move gets sourced to the US and the portion that accrued post move gets sourced to PR. For this purpose, its the actual date of move that matters and not the effective date of the Act 22 decree or the effective date of bona fide PR residency.
Regardless, assuming that the taxpayer elects to allocate some of the gain to PR, then the next question is whether he owes ordinary PR taxes on the gain or something less than that under Act 22. As I read it, the Act 22 decree applies all the way back to January 1 of 2018 (see paragraph 5 of the decree that I posted), so Bob would get the favorable Act 22 tax treatment on that portion of the gain that gets sourced to PR.
The analysis for the second scenario is similar but different. In this case the stock was acquired during 2018 and Bob is considered to be a bona fide during all of 2018, so he acquired the stock as a bona fide PR resident. Consequently (but be sure to confirm this with someone you’re paying for the advice), all gain on the sale of the stock is sourced to PR and none to the mainland. And, since Act 22 status is retroactive to Jan 1 of the year of the move, all the gain would receive the favorable Act 22 tax treatment. (I think. Again, confirm this with Méndez Giovanni or someone you pay).
From Giovanni Mendez:
In Example 1) Bob gets an FTC for the portion of the gain that is accrued pre-move, it’s important to have this in mind because a)AMT may apply im certain cases on pre-move gains and other income b) PR could raise its Cap Gain rates to something higher than the US so although currently the FTC is higher than the tax paid that will not always be the case.
In Example 2, it is correct that the entire gain would be sourced to PR.
In example 3 if in lieu of Crypto we were talking about Stock, the entire gain would be US sourced because he sold prior to having his tax home in PR.
In example 3 Giovanni is referring to personal property being treated differently than securities