Act 60 Tax Benefits in Puerto Rico: 0% Capital Gains Explained

What Is Act 60?

Act 60 of 2019 is Puerto Rico's consolidated tax incentive code. It replaced a patchwork of earlier legislation — most prominently Act 20 of 2012 (Export Services) and Act 22 of 2012 (Individual Investors) — with a single unified statute that organizes all of the island's incentive programs under one legal framework. The full name is the Puerto Rico Incentives Code, and it was signed into law on July 1, 2019.

The chapter that most high-net-worth individuals care about is Chapter 2: Individual Resident Investor. This is the successor to Act 22, and it governs the tax incentives available to US citizens who establish bona fide residency in Puerto Rico. Chapter 3 covers Export Services — the successor to Act 20 — which is relevant to founders and operators who relocate their businesses to the island.

To understand why Puerto Rico can offer these benefits without running afoul of US federal law, you need to understand the constitutional and statutory structure of the relationship between Puerto Rico and the United States. Puerto Rico is an unincorporated US territory, and its residents are US citizens. However, under Section 933 of the Internal Revenue Code, income that is “from sources within Puerto Rico” and earned by a bona fide resident of Puerto Rico is excluded from US gross income. That single provision is the legal foundation for everything that follows. Congress created it deliberately — not as a loophole, but as an explicit policy tool to attract capital to the island. The IRS has acknowledged the statute, audits compliance carefully, but does not contest its legitimacy.

This matters for one critical reason: Act 60 is not a grey area, an offshore scheme, or a workaround. It is a legal incentive program explicitly authorized by the US Congress and administered by the Puerto Rico government. The Puerto Rico Department of Economic Development and Commerce (DDEC) issues the decrees, collects compliance fees, and enforces the requirements. Participants file both Puerto Rico and US federal tax returns every year. Done correctly, it is as compliant as a 401(k) contribution.

The Core Tax Benefits in Detail

0% Tax on Puerto Rico-Sourced Capital Gains

This is the headline benefit, and it is real. Under Act 60, a bona fide resident of Puerto Rico pays 0% Puerto Rico income tax on capital gains sourced to Puerto Rico — and because those gains are excluded from US gross income under IRC Section 933, the federal rate is also 0%. For context, the top federal long-term capital gains rate is 20%, plus a 3.8% Net Investment Income Tax for high earners, putting the effective federal rate at 23.8%. California adds another 13.3%. New York adds 10.9%. A startup founder in California realizing a $10 million gain pays roughly $3.7 million in combined federal and state tax. The same founder, as an Act 60 decree holder in Puerto Rico, pays $0 — on gains that accrued after the move.

The qualifying assets include stocks, cryptocurrency, real estate (on property purchased after becoming a bona fide resident), business sale proceeds, and other capital assets, provided the gain is sourced to Puerto Rico under the applicable sourcing rules. Real estate gains on Puerto Rico property purchased after the move are sourced to Puerto Rico. Gains on US-sited assets can be sourced to Puerto Rico only when the taxpayer is a bona fide resident at the time of sale — the rules are specific and require competent tax counsel to navigate.

0% Tax on Puerto Rico-Sourced Interest and Dividend Income

Bona fide residents with Act 60 decrees also pay 0% Puerto Rico income tax on Puerto Rico-sourced interest and dividend income. For dividend income specifically, the federal qualified dividend rate runs up to 20% plus the 3.8% NIIT — 23.8% federally before state taxes. A portfolio generating $500,000 per year in qualified dividends saves $119,000 annually in federal tax alone under a compliant Act 60 decree. Interest income, taxed as ordinary income on the mainland at rates up to 37%, is similarly eliminated for qualifying Puerto Rico-sourced interest.

4% Flat Corporate Income Tax for Export Services

Chapter 3 of Act 60 provides a 4% flat corporate income tax rate for businesses that qualify as Export Services entities. To qualify, the business must be incorporated in Puerto Rico, have a physical presence and employees on the island, and derive revenue from services rendered to clients located outside Puerto Rico. This covers a wide range of industries: software development, consulting, investment management, asset management, professional services, and others. Combined with a decree holder's personal tax exemptions, the structure can create an extraordinarily efficient tax profile for operators who can genuinely relocate their business activities to the island.

50% Reduction on Property Tax

Act 60 decree holders who purchase a primary residence in Puerto Rico qualify for a 50% reduction in property taxes on that residence. Puerto Rico's baseline property taxes are already among the lowest in the United States — the Centro de Recaudación de Ingresos Municipales (CRIM) assesses values far below market, typically producing effective rates well under 1% of market value. The 50% exemption reduces an already modest bill further. On a $700,000 Condado condo with an effective CRIM rate of 0.5%, the annual property tax bill before the exemption might be $3,500. With the exemption, it is $1,750. The savings are not transformational on their own, but they compound across a 20-year decree period.

Municipal Patent and Excise Tax Exemptions

Act 60 also provides partial exemptions from municipal patent taxes (the license fee that municipalities charge on business gross revenue) and certain excise taxes. The specific exemptions vary by decree type and municipality, but they reduce the operational cost of running a Puerto Rico-based business. For Chapter 3 Export Services entities, the municipal patent exemption can be material for businesses with significant gross revenues, since municipal patent rates are applied to revenue rather than net income.

The Bona Fide Residency Requirements

The tax benefits under Act 60 only apply to bona fide residents of Puerto Rico — and the IRS applies a three-part test to determine whether someone qualifies. This is where the program creates compliance risk for careless participants, and it is why the quality of your tax counsel matters more than the quality of your brochure.

Part 1: The Presence Test

You must be present in Puerto Rico for at least 183 days during the tax year. Days are counted based on physical presence — your cell phone location data, credit card transactions, airline records, and entry/exit stamps all create an audit trail. The IRS and Puerto Rico's Departamento de Hacienda both have access to this data, and they use it. A day in Puerto Rico is any day on which you are present at midnight. Commuter days, travel days, and partial days are counted differently depending on circumstances, and the rules reward stability. If you are splitting time between Puerto Rico and the mainland, 183 days means 183 days — not 170, not 175.

Part 2: The Tax Home Test

Your “tax home” — defined as your principal place of business or employment — must be in Puerto Rico. If your business is a Puerto Rico Export Services entity under Chapter 3, this is straightforward. If you are a passive investor with no active business, the analysis focuses on where you conduct investment activities, where your financial advisors are, where you manage your portfolio, and where business decisions are made. A remote investor who makes all their trading decisions from a laptop in Condado can satisfy this test. An investor who flies to Manhattan to meet with their broker every month and makes investment decisions from a Midtown office cannot.

Part 3: The Closer Connection Test

You must have a closer connection to Puerto Rico than to any other single location. The IRS measures this by looking at your permanent home (where do you own or rent your principal residence?), your family connections (where do your spouse and children live?), your social and professional ties (where are your clubs, religious institutions, professional memberships, doctors?), your voter registration (where are you registered to vote?), and your personal property (where are your cars, furniture, and household goods?).

The most common failure mode for Act 60 holders who get audited is maintaining a mainland home as their “real” primary residence while claiming Puerto Rico residency for tax purposes. Keeping a house in California where your spouse and children live, enrolling your children in mainland schools, maintaining a mainland club membership as your primary social hub, and then spending your required 183 days in a Puerto Rico condo you use like a hotel room will fail the closer connection test. The IRS has won these cases.

The decree holders who succeed in audit are those who genuinely moved their lives. They established a Puerto Rico bank account, got a Puerto Rico driver's license, registered their cars locally, updated their voter registration, moved their primary medical provider to the island, and made Puerto Rico their actual home rather than a tax address. The financial benefits are only available to people who are genuinely willing to make the move.

The Decree Application Process

The Act 60 Individual Resident Investor decree is issued by the Puerto Rico Department of Economic Development and Commerce (DDEC), specifically through the Office of Industrial Tax Exemption (OITE). Applications are submitted through the DDEC's online portal.

Application Fee: $5,000 for individual investor decrees. This is a non-refundable processing fee paid at the time of application submission.

Annual Compliance Fee: $10,000 per year, due on the anniversary of the decree approval date. This fee is paid throughout the term of the decree to maintain active status.

Decree Term: 20 years, with a right of renewal.

Required Documents: A complete application requires proof of US citizenship or permanent residency, a Puerto Rico address (lease or purchase agreement), a statement of intent to establish bona fide residency, a description of the investment activity that will generate qualifying income, financial statements or other evidence of net worth and income, and a certification that the applicant has no outstanding tax liabilities in Puerto Rico. Additional documentation may be requested by the DDEC during review.

Processing Timeline: Under normal conditions, the DDEC processes Individual Investor applications in 3 to 6 months. Applications that are complete, well-documented, and submitted without errors process faster. Applications with missing documents, ambiguous income descriptions, or compliance questions take longer. Engaging a Puerto Rico tax attorney to prepare and submit your application dramatically reduces processing time and the risk of requests for additional information.

Once approved, the DDEC issues a signed decree specifying the effective date, the term, the specific exemptions granted, and the compliance obligations. This is a legally binding document that defines your rights and responsibilities for the next 20 years. Read it carefully with counsel before signing.

Real Estate and Act 60

Act 60 Individual Resident Investor decree holders are required to purchase a residential property in Puerto Rico to use as their primary residence within two years of the decree approval date. This is not optional — it is a mandatory condition of the decree, and failure to satisfy it within the window can constitute a violation that puts the decree at risk.

The primary residence requirement exists by design. The Puerto Rico legislature included it to distinguish genuine resident investors from tax tourists who spend 183 days per year in a rented hotel room without any deeper economic engagement with the island. Purchasing a home demonstrates a financial and personal commitment that is harder to fake than a hotel receipt.

There is no minimum purchase price specified in the law, but the DDEC expects the property to be commensurate with your lifestyle and a genuine primary residence. A condo, single-family home, townhome, or villa all qualify. The property should be titled in your personal name or a revocable living trust where you are the sole grantor and beneficiary. Properties owned through LLCs or other business entities do not satisfy the primary residence requirement for decree purposes, though you should verify the current guidance with your Act 60 attorney at the time of purchase, as administrative interpretation can evolve.

One important restriction: while the property is serving as your qualifying primary residence under the decree, you cannot use it as a short-term rental (Airbnb, VRBO, or similar platforms). The IRS and DDEC take the position that a property listed for short-term rental is not a primary residence. You may purchase additional investment properties on the island — separate from your primary residence — and generate rental income from those. But the decree primary residence must be lived in, not rented out.

Decree holders are also required to make an annual donation of $5,000 to Puerto Rico-based charitable organizations. This is a relatively modest compliance cost compared to the tax savings, but it is a real requirement that must be documented and reported. The DDEC maintains a list of qualifying organizations, and contributions must be made each calendar year.

Pre-Move Capital Gains Planning

This is one of the most misunderstood aspects of Act 60, and getting it wrong is expensive. The key principle: gains that accrued before you became a bona fide resident are still subject to US federal tax, even if you sell the asset after moving to Puerto Rico.

The tax code distinguishes between built-in gains (appreciation that occurred while you were a mainland resident) and post-move gains (appreciation that occurred after you established Puerto Rico residency). For most capital assets, the IRS imposes a special recognition rule: when a US person becomes a bona fide resident of Puerto Rico, they are treated as having sold all of their appreciated assets on the day before the move, triggering recognition of any built-in gain that would otherwise be excluded from US tax. For assets with a holding period over 10 years, there is a partial exclusion that phases in over time.

What this means practically: if you own a stock portfolio with $5 million in unrealized built-in gains on the day you move to Puerto Rico, those gains remain subject to US federal tax when you eventually sell — regardless of when the sale occurs. The 0% rate under Act 60 only applies to the appreciation that accrues after your Puerto Rico residency is established.

For crypto investors, this creates a specific planning opportunity. If you hold cryptocurrency purchased years ago with substantial unrealized appreciation, moving to Puerto Rico and then selling does not eliminate the federal tax on the pre-move appreciation. However, any new positions purchased after establishing Puerto Rico residency are not subject to built-in gain recognition and will benefit from the 0% rate in full. The ideal Act 60 candidate is someone who plans to generate future capital gains — not someone trying to retroactively shelter past gains from tax.

Crypto and Act 60

Puerto Rico has become the single most attractive jurisdiction for crypto tax planning within the US legal system. For US citizens, the foreign tax haven route is not available — the IRS taxes US citizens on worldwide income regardless of where they live, with one critical exception: IRC Section 933, which excludes Puerto Rico-sourced income of bona fide Puerto Rico residents. That provision creates a legal, domestic path to 0% capital gains on crypto, without renouncing citizenship or moving to a foreign country.

The mechanism is straightforward for crypto purchased after establishing Puerto Rico residency. When you buy cryptocurrency in Puerto Rico as a bona fide resident decree holder, the gain on those coins from purchase price to sale price is Puerto Rico-sourced and exempt from both Puerto Rico and US federal income tax under Act 60 and IRC Section 933. A crypto trader who moves to Puerto Rico, accumulates new positions over the next 5 years, and then realizes $3 million in gains pays $0 in combined federal and PR tax on those gains. The same trader on the US mainland would owe roughly $714,000 in federal capital gains tax.

The critical distinction between built-in gains and post-move gains is especially important for crypto, because the asset class can move so fast. A Bitcoin position purchased at $30,000 in 2021 that is now worth $150,000 has $120,000 in built-in gain per coin. Moving to Puerto Rico and selling those coins does not shelter that built-in gain from federal tax. But a new Bitcoin position purchased for the first time after the move, at whatever current prices are, will generate entirely post-move gains that qualify for the 0% rate.

DeFi protocols, NFT trading, staking rewards, and other crypto income streams each have their own sourcing analysis and may be treated differently under the current guidance. The area is evolving rapidly as tax authorities develop positions on novel crypto instruments. Engaging a CPA with specific experience in both Act 60 compliance and cryptocurrency taxation is essential before structuring any significant crypto strategy around the decree.

Common Act 60 Misconceptions

You Still File US Federal Tax Returns

Being an Act 60 decree holder in Puerto Rico does not exempt you from filing US federal income tax returns. You file Form 1040 every year, reporting your worldwide income. However, qualifying Puerto Rico-sourced income is excluded from federal gross income under IRC Section 933 and is reported on Form 8898 (Statement for Individuals Who Begin or End Bona Fide Residence in a US Possession). You also file a Puerto Rico tax return with the Departamento de Hacienda reporting your Puerto Rico-sourced income. Dual-filing is a permanent feature of Act 60 compliance, and it requires a CPA who understands both jurisdictions.

You Still Pay FICA and Social Security

The Act 60 exemptions apply to income taxes — not to payroll taxes. If you receive a W-2 salary from a business, you still pay Social Security (6.2% up to the wage base) and Medicare (1.45%, plus the additional 0.9% above $200,000). Self-employment tax (the combined employee and employer FICA rate of 15.3%) also still applies to self-employment income. The tax savings under Act 60 are specifically on income taxes — capital gains, dividends, interest, and corporate income taxes. The payroll tax system is separate and unaffected.

W-2 Salary Is Not Sheltered

If you work for a US-based employer as a W-2 employee, your salary is US-sourced income regardless of where you physically work. Moving to Puerto Rico does not change the federal tax treatment of your W-2 income. This is one of the most significant limitations of Act 60 and the reason why the program is most beneficial for investors, business owners, and founders — people whose income is derived from capital and business ownership rather than a salary from a US employer.

The IRS Audits Act 60 Holders Seriously

The IRS is aware that Act 60 is a significant tax incentive and monitors compliance aggressively. The agency has specifically designated bona fide residency claims by high-income individuals as an audit priority. This does not mean the program is illegitimate — it means that compliance is not optional and the paperwork matters. Decree holders who genuinely live in Puerto Rico, maintain proper documentation, file correctly, and work with qualified counsel have nothing to fear. Decree holders who treat the island as a tax address while living their real life on the mainland will lose in audit, face back taxes, penalties, and interest, and in cases of fraud, potential criminal liability.

Is Act 60 Right for You?

Act 60's benefits are concentrated in a specific type of income. The program delivers transformational savings for individuals whose primary income comes from capital events — selling appreciated assets, receiving dividends from investment portfolios, trading, or generating profits from a business that can be genuinely relocated to Puerto Rico.

Who benefits most:

• Crypto investors and traders who plan to accumulate and realize gains from new positions purchased after the move
• Day traders and active investors realizing frequent short-term capital gains currently taxed as ordinary income
• Startup founders planning an equity exit within the next 5–10 years who can genuinely move the business to Puerto Rico pre-exit
• Fund managers and hedge fund operators whose carried interest and management fees can be genuinely relocated
• High-dividend portfolio holders with seven-figure investment income from equities and fixed income
• Angel investors and venture investors expecting significant return distributions
• Remote business owners whose clients are all outside Puerto Rico and who can operate genuinely from the island

Who it does not help much:

• W-2 employees of US-based corporations, whose income is US-sourced regardless of location
• Consultants or contractors whose services are directed from and billable to US-based clients without a qualifying Puerto Rico entity structure
• Individuals with income below $200,000 in qualifying categories, where the compliance costs erode most of the savings
• Anyone who is not willing or able to genuinely establish Puerto Rico as their primary residence and spend 183+ days per year on the island

Frequently Asked Questions