Just-In: US IRS Investigating Crypto Traders Benefitting from Tax Havens; Details

US prosecutors and the U.S. Internal Revenue Service (IRS) agents are looking into wealthy crypto traders and fund managers on suspicion of receiving unlawful tax benefits from Puerto Rico. 

According to a June 12 Bloomberg report, investigators are currently developing civil and criminal cases against several hedge fund managers, cryptocurrency traders, and other wealthy Americans who may have lied about the nature of their residency and important components of their income to unfairly benefit from the tax breaks.

Why IRS Is Chasing Crypto Traders?

Since 2012, Puerto Rico has provided large tax breaks to American investors, hedge fund managers, and cryptocurrency traders. Some investors have been able to lawfully avoid paying federal income tax thanks to this legislation, as well as no taxes at all on dividend, interest, and capital gains income.

Investors must maintain close local relationships and live in Puerto Rico for a minimum of 183 days per year to be eligible under the island’s tax policy. In addition, according to Bloomberg, more than 5,000 Americans and 3,600 companies have been eligible for tax breaks since 2012.

Investigators are now examining whether investors have been truthful about the length of their presence on the island and the sources of their income. Investigators and authorities have started to understand that there can be many who are abusing the tax structure. 

Officials from the U.S. are also investigating the lawyers and accountants in charge of promoting the tax program for the island territory, and it is anticipated that at least two of these criminal investigations will lead to charges soon. Authorities are considering accusations of conspiracy and wire fraud.

Should Crypto Traders Worry?

Individuals are given a 100% exemption on dividends under Puerto Rico’s tax laws, a 60% exemption on municipal taxes, and no federal taxes on source income received there. Although the tax benefits are among the most lenient in the world, there are some very severe restrictions to qualify for them.

Peter Schiff, a gold bug, and Michael Terpin, a cryptocurrency trader, are two notable residents who moved to Puerto Rico for tax-related reasons. For failing to meet the net minimum capital requirements, Schiff’s Bank was shut down by Puerto Rican regulators on July 4.

According to Bloomberg, while residents have voiced opposition to the initiative, American investors have profited from the tax policy. Puerto Ricans claim that the strategy favors Americans and drives up real estate costs. When locals protested the policy in 2022, similar allegations started to surface. In its most recent report, Bloomberg made mention of such demonstrations.