Puerto Rico Act 60 can exempt certain Puerto Rico-source investment income from US federal tax for a bona fide resident of the island, but it does not reach backward. Under the sourcing rules in 26 CFR 1.937-2, appreciation that accrued before residency began generally stays US-source and taxable in the United States when the position is sold. The exemption works forward, on post-move appreciation, and only in years where all three residency tests are met. The gap between expectation and regulation is where nearly all the trouble sits.
Part of our guide: Crypto Taxes.
Puerto Rico Act 60: the short version
- 26 U.S.C. 933 excludes Puerto Rico-source income from US gross income for a bona fide resident. The weight sits on “source.”
- Bona fide residency requires all three tests, every year: presence, tax home, and closer connection (26 CFR 1.937-1). Two out of three is a failed year.
- Pre-move appreciation generally stays US-source. Under 26 CFR 1.937-2, gain on property owned before residency began does not become Puerto Rico income because you later moved.
- Form 8898 is required in the year bona fide residency begins or ends (IRS).
- A decree carries annual reporting, a filing fee, and charitable-donation obligations. Those terms change, so confirm the current ones each year.
- The IRS runs an active compliance campaign covering Act 20, 22, and 60 claims (LB&I active campaigns).
- You remain a US citizen with US filing obligations, and non-Puerto Rico-source income keeps its ordinary US treatment.
What Act 60 exempts, and what it never touches
Act 60 is Puerto Rico law, and the federal exemption people are chasing comes from somewhere else: Section 933 of the Internal Revenue Code.
“In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico …”
26 U.S.C. 933(1)
Two things follow. The exclusion belongs to a bona fide resident, a defined status with annual tests rather than a state of mind. And it applies to income sourced in Puerto Rico, under federal regulations the island’s legislature does not write. Act 60 sets how Puerto Rico taxes covered income; it cannot change US sourcing.
So the decree and the federal result are separate questions. A decree with a failed residency test produces no federal exclusion, and a decree with clean residency but US-source gain produces none on that gain either.
The residency tests run every year, not once
Bona fide residency is tested annually, and all three parts must hold in the same year for that year’s income to qualify.
The presence test asks where you physically were, and the regulation gives several alternative day-count and connection routes to satisfy it. It is the most provable of the three and the one people document worst.
The tax home test asks whether your main place of business, or absent one your regular abode, sits outside Puerto Rico. A tax home left on the mainland fails it however many days you spent there.
The closer connection test asks whether your ties run more strongly to the United States or a foreign country than to Puerto Rico. The facts are ordinary: where the family lives, where the home is, where you vote. Form 8898 is then filed in the year residency begins and again in the year it ends.
The pre-move appreciation trap
Pre-move appreciation is the most misunderstood part of Act 60 planning, and for anyone holding crypto bought years ago it is the whole ballgame.
The regulation at 26 CFR 1.937-2 governs when income counts as sourced in a possession, and its treatment of property owned before residency began is the rule that matters. Gain attributable to the period before you became a bona fide resident is generally not possession-source income, which leaves it US-source and taxable when the position is sold. Moving does not reset basis. What Act 60 reaches is appreciation accruing after residency begins.
For long-held tokens that ordering is brutal. Most of the gain in a position bought several cycles ago accrued before the plane took off, and it travels with you as a US liability. Someone who moves and sells in year one often exempts the smallest slice while believing they exempted everything.
The consequence is that the value of every lot on the date residency began is the most important number in the file, and almost nobody records it. Per-lot acquisition dates and basis, the residency start date, the value of each lot on that date, and a named price source. Assembled on day one that is an afternoon of work; reconstructed in year three it is an expensive argument. The regulation’s exact mechanics are specialist territory: confirm them before selling anything.
How the IRS approaches these claims
The IRS treats Puerto Rico incentive claims as an active compliance area, and says so through its Large Business and International campaigns.
The published list includes work aimed at individuals claiming Puerto Rico incentive benefits without meeting the requirements, either the residency tests or the sourcing rules. Form 8898 marks the year a claim begins, a natural starting point.
What holds up is unglamorous: contemporaneous day counts, a home you live in, a tax home genuinely relocated, life ties that moved with you, and disposition records splitting gain across the residency date. Losing a decree for a missed filing is the most avoidable failure here.
What I actually see with Puerto Rico Act 60
The most common belief is that the move works like an eraser. Someone relocates, sells a position held since long before the move, treats the whole gain as federally exempt, and learns about the sourcing rule afterward from the CPA.
The second is the missing residency-date valuation. Nobody wrote down what each lot was worth on the day residency began, so the pre-move and post-move split becomes an argument from price history.
The third is day counting after the fact: boarding passes and card statements assembled in year three to prove year one. It costs more than a weekly spreadsheet would have.
The practice that works: build the file on day one. Residency-date lot valuations, a presence log, a folder for the decree’s obligations, and a memo on how each position will be sourced when sold.
Where Puerto Rico Act 60 goes wrong
Act 60 claims rarely fail because the move was fake. They fail on documentation and sourcing.
The specific failures: selling a long-held position in year one and treating all of the gain as exempt. Meeting two residency tests and assuming that is enough. Never filing Form 8898. Keeping the mainland home, business, and family in place while arguing closer connection to Puerto Rico. Ignoring Puerto Rico’s own tax system, which still applies to whatever the decree does not cover. And relying on a promoter’s summary instead of a specialist, which is how most of the others start.
The decision rule for Puerto Rico Act 60
- Value every lot on the date bona fide residency begins, with a named price source, and keep that file.
- Log presence contemporaneously. A weekly entry beats a year-three reconstruction.
- Move the tax home and the connections in fact. All three tests, every year, or the year does not qualify.
- File Form 8898 for the year residency begins and the year it ends.
- Treat pre-move appreciation as US taxable until a Puerto Rico tax specialist tells you otherwise in writing.
- Diarize the decree’s annual obligations and confirm the terms each year, because they have changed before.
- Engage a CPA and a Puerto Rico tax specialist before the move, since the planning that matters happens before the residency date.
The question that decides most of this is not whether you moved. It is how much of the gain already existed when you did.
Where Puerto Rico Act 60 fits
Act 60 is the most aggressive version of a question people ask in milder forms. Moving states with crypto raises the same residency and sourcing issues. How crypto capital gains are taxed is the baseline any exemption is measured against. Token sale planning is where the timing of a disposition gets decided. And the records checklist is what makes any of it defensible. Part of our guide: Crypto Taxes.
Act 60 is a real regime with a narrow target. It rewards people who move before their gains do, and disappoints those who move afterward.
Sources
- 26 U.S.C. 933, Income from Puerto Rico sources
- 26 CFR 1.937-1, Bona fide residency
- 26 CFR 1.937-2, Possession source income
- IRS, About Form 8898
- IRS, LB&I active campaigns
Related
- Moving States With Crypto: Residency and Tax
- How Are Crypto Capital Gains Taxed?
- Token Sale Tax Planning
- Crypto Tax Planning for HNW Investors
- Common Crypto Tax Record Mistakes
Last updated: 5 August 2026.
This article is general education, not legal, tax, or investment advice. Puerto Rico residency and sourcing outcomes depend on your facts, your records, and the terms of any decree. Talk to a qualified attorney, a CPA, and a Puerto Rico tax specialist about your situation.
