TLDR: you may take the aggressive stance that gains from non-security tokens bought before becoming a BFR-PR and sold after becoming a BFR-PR are PR-sourced, and therefore if sold after your decree effective date, are tax exempt at 0% capital gains rates. Non-security tokens are BTC, maybe XMR, and similar tokens that qualify as personal property, unlike ETH/similar and stocks. You will want a letter from an attorney backing up this opinion in case of an audit (Giovanni Mendez is known to write them)
below is a post from Sean King, a CPA, attorney, and Act 60 decree holder, in the facebook group:
There’s been much discussion about the taxation of built-in gains (gains accruing prior to moving to Puerto Rico), especially as regards cryptocurrency, and whether or not such gains are US taxable. Some have suggested that the tax treatment is obvious and that US taxes must be paid on gains that accrue prior to the move. I’ve researched the issue thoroughly over many months and have concluded that the tax treatment is not so obvious and that in many cases US taxes are not likely owed. Below are my notes which lay out most of the relevant issues for future consideration.
DISCLAIMER
I am a CPA and an attorney but the below is NOT to be considered tax, legal or accounting advice. Rather it is simply intended to inform taxpayers of the relevant tax issues and laws so that they can have more meaningful conversations with their paid tax advisors. Not all relevant issues or laws may be mentioned below. The issues discussed below are complex and may be resolved differently from taxpayer to taxpayer depending upon individual facts and circumstances.
For purposes of the below, Puerto Rico is NOT deemed to be “within the US”. Under US tax law, US possessions are generally considered foreign countries.
THE GENERAL RULE
Whether capital gains on the sale of an asset are subject to US tax or not depends upon application of elaborate sourcing rules within the Internal Revenue Code and associated regulations. Internal Revenue Code (“IRC”) Section 865 provides the general sourcing rules for gains related to the sale of personal property. Personal property is essentially everything other than real estate, business inventory and natural resources and would almost certainly include cryptocurrency.
IRC Section 865 dictates that gains on the sale of such personal property are generally sourced to the taxpayer’s “tax home”. Section 865 specifically provides that “any possession of the US shall be treated as a foreign country.” So, for purposes of this section, any bona fide resident of Puerto Rico would not be deemed to be a “citizen or resident of the US” by virtue of his/her tax home being in PR (a “foreign country”). So, gains on the sale of personal property sold by a bona fide resident of Puerto Rico (PR) whose “tax home” is also in Puerto Rico are not taxed under US federal tax law under the general rule. However…keep reading.
SPECIAL CONSIDERATIONS FOR RESIDENTS OF US POSSESSIONS
IRC Section 937 lays out more exact residence and sourcing rules involving US possessions specifically. Among other things, it states that, except as further provided in that section or in regulations, the general income sourcing rules apply. In this case those general sourcing rules would be the rules of Section 865 just mentioned.
Section 937 goes on to provide that any income that is treated under the general rules (or regulations that alter the general rules) as income sourced from within the US, or any income that is “effectively connected” with the conduct of a trade or business within the US, will be sourced/taxed to the US and NOT to the territory. (Whether or not income from crypto mining on the mainland is “effectively connected” with the “conduct of a trade or business” within the US is beyond the scope of this analysis).
So, we must now look to the regulations under 937, specifically Regulation Section 1.937-2(f)(1), to determine whether they create any exceptions to the general sourcing rules. Short answer? They do.
Regulation 1.937-2(f)(1) provides that, despite the general rules of Section 865, income from within possessions will NOT be considered to include gains from the sale certain types of property—namely any property described in Code Sections 731(c)(3)(C)(i) or 954(c)(1)(B)—when (1) the property was acquired prior to becoming a bona fide resident of the possession, (2) at the time of the sale the seller was a bona fide resident of a possession and (3) the seller was resident of the US (other than a resident of the possession) at any time during the ten years prior to the sale. Said another way, gains on the sale of any property meeting all of these conditions will be taxed by the US in some form or fashion. Only gains on the sale of property that does NOT meet all of these conditions would escape US taxation.
APPLICATION TO PUERTO RICO
Most people moving to Puerto Rico (“PR”) within the last few years to avail themselves of the benefits of Act 22 would have acquired at least some of their cryptocurrency prior to becoming a bona fide PR resident. Consequently, any gains from the sale of any such crypto while a bona fide PR resident and within ten years of establishing PR residency will be sourced to (and taxable by) the US (and not PR) if and only if the property is of a type described in Internal Revenue Code Section 731(c)(3)(C)(i) or 954(c)(1)(B).
IS CRYPTO A TYPE OF PROPERTY DESCRIBED BY 954(c)(1)(B)?
Let’s take the second of these code two sections first since it’s the easiest. IRC Section 954(c)(1)(B) describes property that:
gives rise to certain types of dividends, interest, royalties, rents, or annuities
which is an interest in a trust, partnership or REMIC, or
which does not give rise to any income.
Most types of crypto do not by their nature give rise to any types of income described in 1 above (though they can certainly be used to do so in certain instances). Likewise most crypto cannot be fairly characterized as an interest in a trust, partnership or REMIC. So, the rest of this discussion will assume that the crypto in question is NOT described by 1 or 2 above.
The question is therefore whether or not the crypto is property “which does not give rise to ANY income” (emphasis added). Note that many cryptocurrencies do give rise to income (from staking, chain splits, inflation, air drops, seigniorage, etc.), so perhaps those cryptos escape the clutches of number 3 above? Well, here’s what the relevant regulations under 1.954-2 say:
—-
(3)Property that does not give rise to income. Except as otherwise provided in this paragraph (e)(3), for purposes of this section, the term property that does not give rise to income includes all rights and interests in property (whether or not a capital asset) including, for example, forwards, futures and options. Property that does not give rise to income shall not include -
(i) Property that gives rise to dividends, interest, rents, royalties or annuities described in paragraph (e)(2) of this section;
(ii) Tangible property (other than real property) used or held for use in the controlled foreign corporation’s trade or business that is of a character that would be subject to the allowance for depreciation under section 167 or 168 and the regulations under those sections (including tangible property described in § 1.167(a)-2);
(iii) Real property that does not give rise to rental or similar income, to the extent used or held for use in the controlled foreign corporation’s trade or business;
(iv) Intangible property (as defined in section 936(h)(3)(B)), goodwill or going concern value, to the extent used or held for use in the controlled foreign corporation’s trade or business;
(v) Notional principal contracts (but see paragraphs (f)(2), (g)(2) and (h)(3) of this section for rules that include income from certain notional principal contracts in gains from commodities transactions, foreign currency gains and income equivalent to interest, respectively); or
(vi) Other property that is excepted from the general rule of this paragraph (e)(3) by the Commissioner in published guidance. See § 601.601(d)(2) of this chapter.
—-
Read together quickly, the first sentence and second sentences of the above quoted section of the regs seems to define “property that doesn’t give rise to income” as essentially any RIGHTS OR INTERESTS in property except those rights and interests subsequently listed in the reg. Cryptocurrencies do not seem to qualify as any of the types of property subsequently listed in the regulation (see listing above). So, a casual reading of the regulation might lead one to conclude that cryptocurrencies are “property that doesn’t give rise to (any) income” even when they do in fact give rise to income, and gains on sales within ten years of establishing residency would therefore be at least partially taxed to the US. Right? How convenient for the IRS! Crypto enthusiasts are screwed, right?
Not so fast. If the regulation is read in this manner, then the regulation makes a mockery of IRC Section 954. Note that IRC 954 describes only three types of property— CERTAIN TYPES of income producing property; interests in trusts, partnerships or REMICs; and property that does not give rise to ANY income. The very clear implication of 954 is that there MUST be certain types of property that give rise to income OTHER than dividends, interest, royalties, rents or annuities, and that any such property is NOT governed by 954.
By contrast, if the first two sentences of the relevant regulation are interpreted as defining “property that does not give rise to income” as ALL PROPERTY other than that subsequently listed in the regulation, then its effectively impossible for any other type of income producing property to exist, at least for tax purposes.
Can the regulation in question be interpreted in a way that does not undermine the rather clear intent of the statute? Yes, and in fact this would seem to be the best (if not the required) reading. This can be done by simply recognizing in that the first sentence of the relevant regulations under 954 (see again the quote above for the exact language in question) refers specifically to “rights and interests” in property. However, the statute didn’t contain the words “rights and interests” at all. Why the difference?
It seems clear that the purpose of the first sentence of the relevant regulation (quoted above ) was NOT to define “property that does not give rise to income” as “all property” except as further provided in the second sentence but rather to make it clear that “property” under Section 954 extends to (that is, “includes”) all “rights and interests” in property—that is, derivatives in property such as forwards, futures and options—and is not simply limited to direct ownership of the underlying property itself. So, the first sentence simply emphasizes that derivatives are included in 954’s definition of property, and that’s it.
The second sentence of the reg then goes on to define specific types of property that may NOT be considered to be “property that does not give rise to income” under any circumstances. However, it’s clearly not intended to be an exhaustive list, meaning that other property may exist that is considered to give rise to income under the tax code. Said another way, it’s not necessary for property to be described in the regulation in order for it to be deemed as giving rise to income under 954. And again, if the property gives rise to “any” income, then it’s not covered by 954 and it’s not subject to US taxation (at least not on that basis). Cryptocurrencies that give rise to income by virtue of staking, chain splits, inflation, airdrops, seignorage, etc. don’t seem to be fairly described by Section 954 or the regulations thereunder and are therefore not subject to Section 937’s clawback taxation on that basis.
There are additional reasons to believe that crypto is not described by Section 954. For instance, recognize that IRC Section 954(c)(1)(B) defines “foreign personal holding company income”. In other words, it governs the tax treatment of certain types of gains earned by certain types of controlled foreign corporations, not by individuals. This is why the regulations under Section 954 make frequent mention of “controlled foreign corporations.”
Furthermore, note that the Regs under Section 937 refer specifically to 954(c)(1)(B), which defines personal holding company income, and NOT directly to romanettes (i) through (iii) under 954(c)(1)(B). If the regs under 937 were intended to apply to the types of property listed in romanettes (i) through (ii) of Section 953(c)(1)(B) in all instances, even when owned by individuals, then why doesn’t the regulation cite those romanettes specifically and directly? That could have easily been done.
In short, the regs under 937 can be interpreted (and perhaps should be interpreted?) as applying only to gains on the sale of interests in personal holding companies that own the types of property listed under IRC Section 954(c)(1)(b) romanettes (i) through (iii).
IS CRYPTO A TYPE OF PROPERTY DESCRIBED BY 731(c)(3)(C)(i)?
From the above it seems that at least many types of crypto are not fairly described by 954(c)(1)(B) under some some circumstances. However, per the regulations under Section 937, US clawback taxation still applies if the crypto is described by IRC Section 731(c)(3)(C)(i). That code section describes the following types of property:
(i) Investment partnership The term “investment partnership” means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of—
(I) money,
(II) stock in a corporation,
(III) notes, bonds, debentures, or other evidences of indebtedness,
(IV) interest rate, currency, or equity notional principal contracts,
(V) foreign currencies,
(VI) interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange,
(VII) other assets specified in regulations prescribed by the Secretary, or
(VIII) any combination of the foregoing.
Note that 731(c)(3)(C)(i) defines the term “investment partnership” as partnerships that own certain types of property. Also note that the regulations under 937 refer directly to this “investment partnership” language and NOT directly to Roman numerals (I) through (VIII) under 731(c)(3)(C)(i). If the reg under 937 were intended to apply to the types of property listed in Roman numerals (I) through (VIII) of IRC Section 731(c)(3)(C)(i) in all instances, even when those assets are owned by individuals rather than partnerships, then why doesn’t the regulation cite those Roman numerals specifically and directly? That could have easily been done, but it wasn’t. Consequently, in the absence of any case law or other interpretations to the contrary, its more than reasonable to interpret the regulation as it is written, meaning that only gains on the sale of interests in “investment partnerships” are described by 731(c)(3)(C)(i). Clearly, most crytpo does not qualify as an “investment partnership” as defined in the regulation.
However, even if we torture the wording of the regulation under Section 937 to conclude that any property listed in (I) through (VIII) above is “described by” 731(c)(3)(C)(i) even when owned directly by individuals, then where does that leave us?
Well, in Notice 2014-21, the IRS provided specific direction that “virtual currencies” are to be treated as property for US tax purposes and NOT as money or foreign currency, so (I) and (V) above don’t seem to apply. And even cryptocurrencies that may qualify as “securities” could not fairly be characterized as “stock in a corporation” since there is no corporation (as that term has been historically understood) with crytpo. So, (II) does not apply. Likewise most cryptocurrencies could not be fairly characterized as notes, bonds, debentures, or other evidences of indebtedness, though perhaps some altcoins or stable coins perhaps could. For now I’m going to assume that we’re discussing types of crypto that clearly are not described in (III).
Most crypto likewise could not be fairly considered to be “interest rate, currency, or equity notional principal contracts”, though some crypto could certainly be used to fund smart contracts that might be deemed as such. For now I”m going to assume that (IV) doesn’t apply to the types of crypto at hand.
So far, the IRS has not issued any new regulations that seem to place cryptocurrency under the auspices of 731(c)(3)(C)(i), so (VII) does not seem to currently apply. However, this is likely to change in future at which point the question becomes whether or not the regulation can constitutionally be applied retroactively to taxpayers who already established bona fide residency in PR before the regulation was issued. In other words, once the regulation is effective, does it govern any SALE that occurs after its effective date or does it only apply to taxpayers who establish bona fide residency after that date?
To avoid the possibility of the former, its worth considering the advisability of completely selling all crypto holdings after establishing bona fide PR residency and then subsequently buying back in after a short amount of time (perhaps just a few days). Doing so should establish a new holding period and new basis in the property. The reacquired crypto would then have been purchased WHILE a bona fide resident of PR, so Section 731 would likely not apply to those holdings even if the regs under Section 731 were subsequently amended to include crypto. The wash sale rules would seemingly not generally apply (since they only apply to prevent the realization of losses and not gains), but consider whether the IRS could successfully make some sort of “step transaction” or “economic substance” argument. Such an argument seems unlikely to prevail in my mind so long as the seller assumes the real risk of being out of the market for some reasonable time (and given the volatility of crypto, most any amount of time would seem to involve real risk).
IS CRYPTO A TYPE OF PROPERTY DESCRIBED BY 731(c)(3)(C)(i)(VI)
So, with regard to the vast majority of crypto holdings, the only question under Code Section 731 seems to be whether or not they could be fairly characterized as an “interest in” or a “derivative financial instrument in” any of the listed types of assets (see VI above). To answer this question we must determine what the term “interest in” means for purposes of this regulation.
We noted in our discussion of the regulations under Section 954 that the phrase “rights and interests” simply emphasized that the regulation extends to claims against the specific types of assets noted in the regulation and not just direct ownership of the underlying assets themselves. So, for instance, forwards and options in the described types of property, and not just direct ownership of the underlying property itself, is included with the scope of the regulation.
It seems clear that Roman numeral VI under IRC Section 731(c)(3)(C)(i) is simply doing the same thing. It’s simply making clear that indirect interests in (that is, claims to) the types of assets described in the other subclasses (or traded on certain exchanges) are included within the scope of the regulation. That the term “interest in” is meant to describe only indirect interests (that is, claims to) such assets is evident when we remove extraneous language. For instance, the phrase “interests in…any asset described in any other subclause of this clause” is completely redundant if the word “interest” includes direct ownership of such assets. It seems clear that Roman numeral VI was added simply to bring indirect interests in the proscribed property within the statute’s grasp. This interpretation is bolstered by the fact that the statute immediately mentions derivative claims as examples of such indirect interests.
It’s important to recognize that, if this interpretation is correct, then Roman numeral VI only governs indirect interests in certain assets and not direct interests at all. So, indirect “interests in… or derivative financial instruments…in any commodity traded on or subject to the rules of a board of trade or commodity exchange” are included within the scope of the regulation, but direct ownership of assets traded on such exchanges is not UNLESS those assets are described in one of the other subclasses (that explicitly address direct ownership). And as noted above, direct ownership of crypto generally does not fall within the scope of the other subclasses. Where that’s the case, crypto would seem to be excluded from the scope of the relevant statute, meaning that it escapes US clawback taxation.
This raises a question: Why would Congress have intended to include within the scope of Roman numeral VI only indirect interests in assets traded on exchanges and not direct interests? There are many possibilities. First, the distinction could have simply been an oversight resulting from poor drafting of the statute. Or, perhaps more likely, Congress may have recognized that indirect interests have different characteristics than direct ones and should be taxed differently. For instance, indirect interests usually involve the use of leverage, have a shorter holding period, may be more speculative in nature, etc.
However, even if we conclude that the above interpretation is wrong and that Roman numeral VI of 731(c)(3)(C)(i) governs direct interests in prescribed property also, then we have more work to do. In that case we must determine whether the phrase (from the statute) “in any commodity traded on or subject to the rules of a board of trade or commodity exchange” modifies the preceding word “asset” or whether it instead modifies the preceding words “interests in”. Said another way, does the wording of the statue describe INTERESTS that are traded on or subject to the rules of a board of trade or commodity exchange”, or does it instead describe all ASSETS that are anywhere so traded or so subject even if your particular interest in the property is acquired and/or sold off such an exchange? Do we determine which assets are governed by the statute on a holding-by-holding basis or on an asset class by asset class basis?
For reference, here’s the complete phrasing of the relevant portion of the statute:
interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange
In the absence of any binding interpretive guidance, I think the best reading of the statute is that it only applies only to your INTERESTS (that is, your ownership) of properties that are so traded or so regulated and not entire asset classes that are sometimes so traded or regulated. This interpretation is bolstered by at least two things.
First, notice that subclause VI of the statue could more easily and more clearly have been written by simply saying “assets that are described in any other subclause herein or that are traded on, or subject to the rules of, a board of trade or commodity exchange, or any derivative financial instruments in any of the foregoing”. Instead, it begins by saying that it applies only to “interests in” or “derivative financial instruments in” assets that are traded/regulated in the prescribed manner.
Second, look at all the other assets listed in the other subclauses of the statute (money, stocks, debt instruments, foreign currencies, etc.). Note that they simply mentions these assets directly. They don’t says “interests in money” or “interests in stocks”. So, why does Roman numeral VI say “interests” in commodities that are traded/regulated in certain ways?
As a maxim of statutory interpretation, no word in a statute should be considered superfluous or redundant if an alternative interpretation exists that renders the words relevant and operative. So, either the word “interest” in subclause VI is superfluous and redundant (awkwardly so), or there must be another interpretation that renders the word operative and relevant.
In fact, there is such an alternative interpretation: The awkward wording of subclause VI of the statute suggests that its intended to apply ONLY to any interest or holding that is traded on or subject to the rules of a board of trade or commodity exchange and NOT to interests in those same assets that are not. The wording implies that the determination is to be made on an interest-by-interest—that is, a taxpayer-by-taxpayer and holding-by-holding basis— rather than an asset class-by-asset class basis.
For instance, a given taxpayer’s interest in bitcoin obtained from mining that is subsequently sold over the counter or peer-to-peer (for instance, via localbitcoins.com) would not be traded on or subject to the rules of any board of trade or commodity exchange. Yes, bitcoin in general may sometimes be so traded or regulated, but this particular interest in bitcoin was not. By contrast, a taxpayer’s interest in bitcoin that was acquired on Coinbase (likely deemed to be a regulated commodities exchange), held on Coinbase when the seller became a bona fide resident of PR and then subsequently sold on Coinbase would be traded on and subject to the rules of such exchange.
The CFTC has ruled that most cryptocurrencies are commodities. However, as I understand it, the CTFC only has authority to regulate certain types of commodity transactions (where leverage, margin trading or future delivery is involved). Consequently its rules generally don’t apply to the “spot” markets (except its anti-manipulation and anti-fraud rules and the like since these activities indirectly impact the futures markets). And apparently the CTFC exempts from its rules transactions where physical delivery occurs within 28 days.
I’m not sure exactly what constitutes a “board of trade” or “commodity exchange” for purposes of the statute. I don’t see those words defined in the regulations. Would any exchange that is regulated by the CFTC (like Coinbase.com) qualify? I don’t’ think the answer to that question is at all clear at this point.
DOES TIMING MATTER FOR PURPOSES OF 731(c)(3)(C)(i) AND 954(c)(1)(B)?
If the above interpretation of the statute is reasonable, then at what point in time do we assess whether the relevant interest in the commodity is traded on or subject the rules of an exchange? When the interest was acquired? At the time the taxpayer became a bona fide resident of the US posession? At the time the interest is sold? Must it meet the criteria at ALL of these times in order to be covered by the statute?
Regulation Section 1.937-2(f)(1) isn’t all that helpful in providing an answer to these questions. Here’s the relevant portion of the the regulation again:
(f)Gains from certain dispositions of property -
(1)Property of former U.S. residents.
(i) Except to the extent an election is made under paragraph (f)(1)(vi) of this section, income from sources within the relevant possession will not include gains from the disposition of property described in paragraph (f)(1)(ii) of this section by an individual described in paragraph (f)(1)(iii) of this section. See also section 1277(e) of the Tax Reform Act of 1986, Public Law 99-514 ( 100 Stat. 2085) (providing that gains from the disposition of certain property by individuals who acquired residency in certain possessions will be considered to be from sources within the United States).
(ii) Property is described in this paragraph (f)(1)(ii) when the following conditions are satisfied -
(A) The property is of a kind described in section 731(c)(3)(C)(i) or 954(c)(1)(B); and
(B) The property was owned by the individual before such individual became a bona fide resident of the relevant possession.
(iii) An individual is described in this paragraph (f)(1)(iii) when the following conditions are satisfied -
(A) For the taxable year for which the source of the gain must be determined, the individual is a bona fide resident of the relevant possession; and
(B) For any of the 10 years preceding such year, the individual was a citizen or resident of the United States (other than a bona fide resident of the relevant possession).
Per (iii) above, the residential status of the individual is clearly determined as of the taxable year for which the gain must be determined. But is that also when the status of the property under Code Section 731(c)(3)(C)(i) or 954(c)(1)(B) is determined?
It’s reasonable to interpret the regulation as stating that the status of the property—that is, whether it’s covered under Code Section 731(c)(3)(C)(i) or 954(c)(1)(B)—is to be determined at the time the gain is triggered. But if that’s the case, then why doesn’t that statute clearly say so (as it does with determining the residential status of the seller)?
Given the ambiguity, it’s also possible and reasonable to interpret the statute as requiring that the status be determined as of the time the taxpayer became a bona fide resident. In other words, the property in question must BOTH be of a kind described in the two cited code sections AND be owned by the individual (as such covered property) prior to the change in residency.
And finally, it’s possible (and maybe most reasonable?) to interpret the statute as requiring that the status of the property be determined at the time the property was originally acquired by the taxpayer in question.
Answering this question matters because the CFTC did not start regulating cryptocurrency exchanges until September 2015. And many types of crypto are still not traded on regulated exchanges or subject to the rules of any board or exchange. Finally, the status of a given interest or holding can change over time (for instance, it could be held on a regulated exchange or transferred off of that exchange).
So, for instance, what about bitcoin or Ethereum or other crypto that was acquired before the rules of any commodities regulator applied?
If the first interpretation (status of the property is determined at the time of sale) applies, and if the status of the property is determined on an interest-by-interest basis rather than an asset class-by-asset class basis, then any gains from the sale of an interest in cryptocurrency that is sold by a bona fide Puerto Rico resident over-the-counter or peer-to-peer and free from the rules of a regulated exchange would reasonably be sourced to Puerto Rico regardless of when and how the interest was acquired and regardless of its status at the time it was acquired or when the taxpayer moved to PR. Under this interpretation, the taxpayer could have purchased it on a regulated exchange but the gain on its sale would be sourced to PR so long as it was not SOLD on such an exchange.
If the second interpretation applies (status of the property is determined at time of change in residency), then the sourcing of any gains from the sale of crypto by a bona fide resident of PR would depend upon that property’s status (was that particular interest sufficiently regulated or not) at the time of the move. In this case the interest could be sold on a regulated exchange and still sourced to PR provided that the interest in the property in question was not held on or subject to the rules of any exchange at the time of the move to PR.
And lastly, if the third interpretation (that the status of the property is determined at the time of its acquisition) applies, then interests in bitcoin or Ethereum acquired before they became subject to the rules of regulated exchanges could be sold by a bona fide PR resident in any manner whatsoever, including on a regulated exchange), and not trigger US tax. By contrast, interests acquired after that date may be subjected to US tax.
Other variations of the above three interpretations are also possible.
APPORTIONING GAINS BETWEEN THE US AND POSSESSIONS
If despite the logic above the crypto in question is deemed to be described by Code Section 731(c)(3)(C)(i) or 954(c)(1)(B), then all the gain upon its sale within ten years of establishing residency in PR is sourced to the US unless the taxpayer elects to source a proportional share to PR. The proportional share that one can elect to source to PR is determined for “marketable securities” based upon relative market values (at time of move versus at time of sale) and for all other assets based upon the respective holding period. To be considered a “marketable security” it must have been “actively traded” on a regulated exchange (see the Reg 1.937-2 for details on what qualifies) during the taxpayer’s ENTIRE holding period. It’s interesting that the reg specifies that this condition must be satisfied for the entire holding period but its silent regarding when the status of the property under 731 and 954 is to be determined (at the time its acquired, at the time of the move, at the time of sale, or all of the above?).