Puerto Rico Capital Gains Under Act 60: What Is Actually 0% — and What Is Not
One of the most widely discussed benefits of Puerto Rico’s Act 60 is the possibility of paying 0% tax on certain capital gains. But the rule is often misunderstood. The reality is more nuanced. If you are considering relocating to Puerto Rico to reduce capital gains tax, you must understand: which gains qualify, when they qualify, how sourcing works, what happens to pre-move appreciation, when the 5% rule applies.
The Legal Framework
Puerto Rico’s Individual Investor incentive (formerly Act 22, now Chapter 2 of Act 60) provides:
100% exemption from Puerto Rico income tax on interest and dividends
100% exemption from Puerto Rico tax on certain capital gains accrued after becoming a bona fide resident
Separately, Internal Revenue Code §933 allows bona fide Puerto Rico residents to exclude Puerto Rico-source income from U.S. federal taxation. This combination can create powerful tax efficiency — but only if structured properly.
Rule #1: Only Post-Residency Appreciation May Qualify for 0%
The most important rule is this: Capital gains attributable to appreciation that occurs after you become a bona fide Puerto Rico resident may qualify for Puerto Rico tax exemption. Pre-residency appreciation does not automatically disappear.
Example: If you bought stock for $1 million, and it grows to $5 million before you move, and then grows to $8 million after you move, only the $3 million of appreciation that occurred after residency may qualify for exemption under Act 60. The $4 million of pre-move appreciation remains subject to U.S. federal capital gains tax.
Rule #2: The 10-Year / 5% Special Rule
Act 60 contains a special provision for pre-residency gains. If you become a bona fide Puerto Rico resident, you hold the asset for at least 10 years after becoming a resident, and you recognize the gain before January 1, 2036, then the pre-residency portion of the appreciation may be subject to a reduced 5% Puerto Rico tax rate (instead of regular Puerto Rico capital gains rates).
However: this does not eliminate U.S. federal taxation on the pre-residency portion. The 5% rate applies to Puerto Rico tax treatment — not federal tax.
Rule #3: Bona Fide Residency Is Required for the Entire Taxable Year
To benefit from Act 60 capital gains treatment, you must:
Be a bona fide resident of Puerto Rico for the entire taxable year
Satisfy the Physical Presence Test
Satisfy the Tax Home Test
Satisfy the Closer Connection Test
File IRS Form 8898 when relocating
Rule #4: Not All Assets Are Treated the Same
Marketable Securities - Gains from stocks, ETFs, and similar securities follow the allocation rule described above.
Digital Assets / Cryptocurrency - Capital gains treatment follows similar sourcing principles, but federal reporting and valuation documentation must be carefully maintained.
Sale of a Business - The sourcing of gain from the sale of a business depends on: asset composition, location of trade or business, seller’s tax home.
What Does NOT Qualify for 0%? Common Misconceptions
“All U.S. capital gains become tax-free.” - False.
“Moving eliminates tax on appreciation built over 20 years.” - False.
“You can move one year before selling and eliminate all capital gains tax.” - False.
Only post-residency appreciation may qualify for Puerto Rico tax exemption.
IRS Scrutiny Is Increasing
In 2021, the IRS Large Business & International Division launched a compliance campaign targeting Puerto Rico relocation cases. Common audit focus areas include:
Improper residency claims
Incorrect sourcing allocations
Failure to allocate pre-residency gains
Misreporting U.S.-source income
When the Strategy Works Best
Act 60 capital gains planning is most effective when:
You relocate before major liquidity events
You anticipate significant post-move growth
You build value after becoming a resident
You maintain strict residency compliance
Early relocation — before the business or asset appreciates substantially — creates the most efficient outcome.
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*This article is provided for informational purposes only, and does not constitute legal advice, counsel or representation.
