By: Marisel Valentín Márquez, Esq., CPA & Janira Beltrán Sellés, Esq.

The rise of cryptocurrencies and all related technologies, such as blockchain, have swiftly revolutionized the financial and technology business sectors. Lawmakers and regulators, including taxing authorities in the United States and Puerto Rico, have yet to establish a final regulatory framework.  However, this does not imply that individuals and businesses are exempt of complying with their fiscal responsibilities. On the contrary, under current law, Puerto Rico and United States governments have the power to tax virtually any activity that produces a financial benefit, regardless of its novelty.  It is thus clear that taxing authorities will use their power to collect information to insure taxpayer’s compliance related to cryptocurrencies activities.^[1]

What do we know about cryptocurrency taxation in the U.S.?

 The United States’ taxing authority, the Internal Revenue Service (“IRS”), only guidance on cryptocurrency taxation is Notice 2014-21. In said notice, the IRS established the following general principles regarding the taxation of cryptocurrencies:

• Transactions using cryptocurrencies must be reported in U.S. dollars. The fair market value for cryptocurrencies listed on an exchange (and the exchange rate is established by market supply and demand) will be determined by converting the value of the cryptocurrency into U.S. dollars at the exchange rate, in a reasonable, consistently applied manner. 

• Cryptocurrencies will be considered “property”, not currency, for federal tax purposes. As such, general tax principles applicable to property transactions will apply. Taxpayers will have a gain or loss upon the exchange of property for other property. The character of the gain or loss, as capital or ordinary, will depend on whether the cryptocurrency is considered a “capital asset” in the hands of the taxpayer.

• Taxpayers who receive payment for good and/or services in cryptocurrencies need to include as income, the fair market value of the cryptocurrency as of the date of receipt. Moreover, cryptocurrency payments between merchants and their customers handled by a third-party settlement organization (TPSO) must be reported to the merchant by the TPSO on Form 1099-K, Payment Card and Third Party Network Transactions, if for the calendar year the transactions settled for the merchant exceed 200 in number and $20,000 in gross amount.

• The payment of cryptocurrency for services rendered by an employee will be considered taxable wages. As such, they will be subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax, and must be reported on Form W-2, Wage and Tax Statement.  Similarly, the payment in cryptocurrency for services rendered by an independent contractor will be self-employment income subject to self-employment tax, and subject to reporting on Form 1099-MISC, Miscellaneous Income (for payments of $600 or more in a taxable year). Both types of payments will be reported by using the fair market value of the cryptocurrency as of the date of payment.

         The 2014 decision by the IRS, to classify cryptocurrencies as “property” has raised many questions.^[2] An important and perhaps unclear area is a U.S. taxpayer’s responsibility (which includes Puerto Rico residents) with cryptocurrency and/or accounts outside the U.S. and their reporting of such accounts for Foreign Bank Account Report (i.e. FinCEN 114) and/or Specified Foreign Financial Assets (i.e. Form 8938) purposes. Non-compliance with said provisions can lead to steep penalties and criminal charges for taxpayers.

The newly enacted Tax Cuts and Jobs Act of 2017 did not clarify or further address cryptocurrency taxation. However, upon modification of the “like-kind exchange” provision to limit its applicability only to an exchange of real property, it eliminated the possibility that some taxpayers may use the provision to defer reporting gains upon cryptocurrency exchanges.

 What do we know about cryptocurrency taxation in Puerto Rico?

Puerto Rico’s taxing authority, the Department of Treasury (“Hacienda”, by its Spanish name), has yet to issue any administrative guidance on cryptocurrencies. Based on the similar in language of Puerto Rico’s tax code provisions with respect to property as to their U.S. counterparts, we understand cryptocurrency will be classified as “property” and general tax principles applicable to property transactions will apply.  Reporting requirements upon the payment in cryptocurrency to employees and or independent contractors will most likely be enforced and successful mining activities will most likely generate taxable income for taxpayers in Puerto Rico.  Pertaining “like-kind” exchanges, Puerto Rico’s “like-kind” exchange provision has analogous language as had its U.S. counterpart prior to its modification by the Tax Cuts and Jobs Act of 2017.

A key lead for Puerto Rico among other jurisdictions is that Puerto Rico’s tax incentive laws enacted prior to the cryptocurrency boom, already provide a favorable tax framework that can be used by individuals and businesses in Puerto Rico engaged in cryptocurrencies and all related technologies, such as blockchain. For example, Act 22-2012, provides until the year 2035 a 100% tax exemption in Puerto Rico for securities capital gains, interest and dividends sourced in Puerto Rico to individuals who have not been residents of Puerto Rico prior to the year 2012 and become bona fide residents of Puerto Rico. An individual with a tax exemption under Act 22-2012 can also request the tax benefits of Act 20-2012, Act 73-2008, and Act 273-2012 for their business activities, as explained below.

Act 20-2012, provides among other tax benefits, a flat 4% tax rate for a 20-year period (renewable for another 10 years), for individuals and business in Puerto Rico who engage in activities for markets/clients outside Puerto Rico, such as most types of services, and development of licensable computer software.  Similarly, Act 73-2008, provides among other tax benefits, a flat 4% tax rate for a 15-year period (renewable for another 10 years), for individuals and business in Puerto Rico who engage in certain activities such as software development (produced on a commercial scale) and service centers for data processing and storage, for markets in Puerto Rico or outside Puerto Rico.

For new banking and financial activities in Puerto Rico for clients located outside Puerto Rico, Act 273-2012 provides, among other tax benefits, a flat 4% tax rate for a 15-year period (renewable for two additional 15-year periods). Banking and or financial activities under Act 273-2012, require approval of the Office of the Commissioner of Financial Institutions (“OCIF”).

The tax benefits conferred by the various tax incentives acts are not automatic, thus individuals or businesses must file a request in the Puerto Rico Industrial Development Company (“PRIDCO”).  Moreover, the tax benefits conferred by Act 20-2012, Act 22-2012, Act 73-2008, and Act 273-2012 are not mutually exclusive and can be requested by a single individual or business, since they incentivize different types of activities.

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         Although the issuance of further tax guidance for cryptocurrencies is needed in both the U.S. and in Puerto Rico, individual and businesses engaged in cryptocurrencies activities and all related technologies are not exempt of complying with their fiscal responsibilities. As such, we strongly urge taxpayers to take actions to stay in compliance in light of their current activities and to remain vigilant of new pronouncements by lawmakers and regulatory agencies.  Our lawyers may help you with these and other tax compliance and planning matters.

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This publication is a summary of the recently enacted pronouncements and/or case law referred to herein and is not intended to substitute legal advice.  We encourage you to contact us or your tax advisor if you have any questions or need assistance regarding any of the matters presented herein.  An attorney-client relationship with Pellot-González, P.S.C. cannot be formed by reading or responding to this memorandum.  Such a relationship may be formed only by express agreement with Pellot-González, P.S.C.

On June 30, 2016, a Financial Oversight and Management Board has been assigned to Puerto Rico by the United States Federal Government with the enactment of Public Law 114-187 (“Puerto Rico Oversight, Management, and Economic Stability Act”).  This Oversight Board has ample powers over actions that may be taken by the Puerto Rico Government in pursuit of economic development, such as, new incentives laws or new tax decrees.

[1] United States v. Coinbase, Inc., No. 17-cv-01431-JSC, 2017 BL 426697, 2017 ILRC 3091 (N.D. Cal. Nov. 28, 2017).

[2] United States v. Hom, No. C 13-03721 WHA, 2014 BL 155262, 2014 ILRC 2033 (N.D. Cal. June 04, 2014), Court Opinion.