Puerto Rico Act 60 (formerly known as Acts 20 and 22) offers US citizens who establish bona fide Puerto Rico residency a 4% flat tax rate on net capital gains and 0% on dividends and interest - provided those gains arise after the individual becomes a bona fide Puerto Rico resident. For a high-net-worth individual with concentrated stock positions or a cryptocurrency portfolio with large unrealized gains, the potential tax savings from Act 60 are substantial. But the IRS actively audits Act 60 participants, the residency requirements are strict, and the tax benefits apply only to income sourced to Puerto Rico after residency is established - not to pre-move appreciation.
4% flat tax on capital gains: Long-term capital gains recognized by a bona fide Puerto Rico resident from assets acquired after establishing residency are taxed at 4% by Puerto Rico. These gains are excluded from US federal income tax under IRC §933 if properly sourced to Puerto Rico.
0% on dividends and interest: Dividends and interest from Puerto Rico sources received by a bona fide Act 60 resident are exempt from Puerto Rico tax and excluded from US federal income tax under §933.
Annual requirements: $10,000 charitable contribution to Puerto Rico-based charities; maintain bona fide Puerto Rico residency for the full tax year; file Puerto Rico income tax return; comply with all reporting obligations including IRS Form 8898.
To qualify for Act 60 benefits, a US citizen must be a bona fide resident of Puerto Rico. Bona fide residency under IRC §937 requires meeting all three of the following tests:
Presence test: The individual must be present in Puerto Rico for at least 183 days during the tax year. The IRS also uses a "closer connection" analysis - the individual's tax home must be Puerto Rico, and they cannot have a closer connection to the US or another foreign country.
Tax home test: The individual's tax home (regular or principal place of business) must be in Puerto Rico. Remote workers who maintain US clients and US business ties face scrutiny on this requirement.
Closer connection test: The individual must not have a closer connection to the US than to Puerto Rico. The IRS examines: where the family home is, where the family lives, where social and professional connections are centered, where personal property is located, and where professional licenses are maintained.
Act 60 benefits apply only to gains from assets acquired after establishing Puerto Rico residency. A US investor who holds $5 million of Apple stock with a $500,000 basis does not escape federal capital gains tax by moving to Puerto Rico and then selling. The $4.5 million of pre-move appreciation remains US-sourced income fully subject to federal capital gains tax. Only appreciation that accrues after the move - from assets the individual acquires as a Puerto Rico resident, or from the continued appreciation of existing assets after the residency date - benefits from the Act 60 rate.
Planning opportunity: assets with embedded gains should ideally be sold before the move (paying federal tax at 20-23.8%) if the post-move appreciation is expected to be significant, OR held until Puerto Rico residency is established and sold after the move with only post-residency gains taxed at 4%.
Under IRC §937 and its regulations, a US citizen who becomes a bona fide resident of Puerto Rico must file Form 8898 (Statement for Individuals Who Begin or End Bona Fide Residence in a US Possession) with their federal tax return for the year they establish or terminate Puerto Rico residency. Failure to file Form 8898 when required carries a $1,000 penalty per year of failure. Act 60 residents must also file Puerto Rico income tax returns and pay the 4% Act 60 rate to Puerto Rico on qualifying income.