Act 60ers should routinely reset their cost basis (sell and re-buy) for PR-sourced assets as insurance against future PR and IRS tax changes. Lots of changes potentially coming down the pipe with fresh IRS agents, a white house and SEC that are stating their intentions to be more aggressive, and SBF’s fraud fallout
read more from Prelocate’s relocation guidebook:
On top of the extra money you get to keep, the Act 60 Investor Resident Individual decree offers a unique opportunity to investors: the ability to continually sell and rebuy assets without any negative tax impacts. This allows you to reset your tax basis higher and higher, which can prove useful when the asset’s price is increasing. Though the tax basis doesn’t matter as long as the tax benefits apply to you, since you pay a 0% tax rate, setting your basis higher can be important if you lose the tax exemption benefits. This could happen for a number of reasons—for instance, your tax decree could be revoked due to noncompliance, Puerto Rico could become a state, Congress could revise the tax law to have Puerto Rican residents pay mainland taxes, Congress could change the rules to determine Puerto Rico-sourced capital gains, or the Puerto Rican government could amend the program in a way that makes compliance prohibitively expensive.
Resetting your tax basis can also help if you’re unsure whether a particular gain is sourced from Puerto Rico or the United States. If you hold a position for many years and sell it for a large gain, you may find that income subject to mainland taxes if the IRS decides you didn’t qualify as a bona fide Puerto Rican resident for the year of the gain. However, if you sell and rebuy your asset each year, you limit the risk of having to pay U.S. taxes due to IRS determinations to annual gains rather than all the gains on the asset since your initial purchase.
As long as the asset’s value increases materially, you should not experience any downside to selling and rebuying it. It should be possible to buy the asset again after just a few minutes or hours. It’s recommended to set a reminder for yourself to sell and rebuy your assets at least once each year [we recommend in December], but it would also be a good idea to do it whenever a volatile asset shoots up in price. Cryptocurrency is a prime example.
Before employing this strategy, we strongly recommend establishing residency in Puerto Rico and consulting a tax advisor to determine whether gains on the asset in question can indeed be considered Puerto Rico-sourced and whether federal bifurcation rules apply to it. Additionally, if you’re planning to fully commit to Puerto Rico long term—to the extent that your bona fide residency will be obvious and not disputed by the IRS—this may not be the best strategy, because if you hold an asset for 10 years and fulfill the bona fide residency requirements for the entire period, a reduced long-term capital gains rate of 5% would apply on any gains sourced in the United States prior to establishing Puerto Rico residency. This reduced 5% rate is substantially lower than the normal capital gains rate for long-term capital gains sourced exclusively in the United States, which as of the publication date of this guidebook varies between 18.8%-23.8% with the full Medicare Contribution Tax (with additional City and State taxes depending on your location within the United States).