Capital gains tax in Puerto Rico

Puerto Rico occupies a distinctive position in U.S. tax law. As a self-governing territory, it administers its own income tax system through the Puerto Rico Internal Revenue Code (PRIRC), enforced by the Departamento de Hacienda. At the same time, U.S. citizens residing in Puerto Rico interact with the federal Internal Revenue Code, particularly IRC Section 933, which excludes Puerto Rico-source income from U.S. federal gross income for bona fide residents. The interplay between these two systems determines the real capital gains burden for any individual who holds, or plans to acquire, appreciated assets in or connected to Puerto Rico.

What are the standard Puerto Rico capital gains tax rates under the PRIRC?

Under the Puerto Rico Internal Revenue Code, long-term capital gains -- those arising from assets held for more than one year -- are subject to a flat preferential rate of 15%, payable to Hacienda. Short-term capital gains, from assets held one year or less, receive no preferential treatment: they are included in ordinary income and taxed at the PRIRC's progressive brackets, which run from 0% on the first USD 9,000 of net taxable income through 7%, 14%, and 25% tiers, reaching 33% on income above USD 61,500. A Gradual Adjustment Tax of 5% applies on net taxable income above USD 500,000, and an Alternate Basic Tax (ABT) applies at rates from 1% to 24% depending on income level, functioning as a floor to prevent excessive deductions from eliminating liability entirely. For context, a taxpayer realizing a USD 200,000 short-term capital gain in Puerto Rico, with no other income, would face ordinary-rate taxation through those brackets up to a maximum marginal rate of 33%.[1][2]

How does IRC Section 933 affect federal tax on Puerto Rico-source capital gains?

IRC Section 933 provides that a U.S. citizen who is a bona fide resident of Puerto Rico for the entire taxable year may exclude Puerto Rico-source income from U.S. federal gross income -- with the sole exception of compensation for services performed as a U.S. government employee. The practical consequence for capital gains is significant: if a bona fide Puerto Rico resident realizes a gain that is sourced to Puerto Rico under the applicable sourcing rules (primarily IRC Section 865, which sources personal property gains to the seller's tax home), that gain is excluded from the U.S. federal return entirely. The individual files a Puerto Rico income tax return with Hacienda and pays the PRIRC rate, but reports nothing to the IRS for that income. U.S. citizens must still file Form 1040 and disclose the excluded income for purposes of computing allowable deductions, but the gain itself is removed from U.S. taxable income.[3][4]

Critically, Section 933 requires residency for the entire taxable year. In the year of the move itself, the statute provides a partial-year exception under IRS Publication 570: an individual moving to Puerto Rico satisfies the tax home and closer connection tests for that year if they were not a bona fide resident in the prior three years, had no tax home outside Puerto Rico during the final 183 days of the year, and remain a bona fide resident for the following three years.

What is the Act 60 Individual Resident Investor 0% capital gains rate, and what exactly qualifies?

Act 60 of 2019 (consolidating the earlier Act 22 of 2012) allows qualifying individual resident investors to obtain a tax decree from the Puerto Rico Department of Economic Development and Commerce (DDEC) that reduces their Puerto Rico income tax rate on certain passive income -- including capital gains -- to 0%. This is the centerpiece of Puerto Rico's tax-incentive offering for mobile investors and is the source of much of the territory's profile as a relocation destination for high-net-worth individuals.

The 0% rate applies exclusively to capital gains that accrue after the individual establishes bona fide Puerto Rico residency. An investor who becomes a bona fide resident on January 1 of a given year and subsequently purchases stock in that same year will pay 0% Puerto Rico tax on any gain recognized when selling that stock, provided the decree is in force and the gain is Puerto Rico-sourced. The combined result of Act 60 plus the IRC Section 933 exclusion is that a qualifying investor may face neither Puerto Rico income tax nor U.S. federal income tax on such post-residency, Puerto Rico-source gains.[5]

Important 2026 program change: for new applications submitted on or after January 1, 2027, the DDEC Act 60 resident-investor decree will offer a 4% preferential rate (not 0%). Individuals who obtained or obtain a decree by December 31, 2026 are grandfathered at the 0% rate through a program now extended to 2055.[6]

What happens to capital gains that accrued before the move to Puerto Rico?

This is the most consequential limitation of the Act 60 / IRC Section 933 structure. Pre-residency appreciation does not become Puerto Rico-source income simply because the individual later becomes a Puerto Rico resident. Under Treasury Regulation Section 1.937-2(f), gain on investment property -- stocks, bonds, and similar passive assets -- owned before the taxpayer became a bona fide Puerto Rico resident is not treated as Puerto Rico-source income if the property is sold within 10 years of establishing that residency. During that 10-year window, the pre-residency portion of the gain retains its U.S.-source character and remains subject to U.S. federal capital gains tax at applicable federal rates.[7]

Two allocation methods determine what portion of gain is pre-residency versus post-residency. Under the apportionment method, total gain is multiplied by the fraction of the holding period during which the seller was a non-resident; under the step-up election, the asset's fair market value on the date the individual established Puerto Rico residency is treated as the adjusted basis for sourcing purposes, so only appreciation above that date-of-move value is considered post-residency. The step-up election is generally irrevocable for the asset once made. After a taxpayer has held a pre-residency asset for more than 10 years as a bona fide Puerto Rico resident, the entire gain qualifies as Puerto Rico-source and may be eligible for the Act 60 0% rate on the post-residency portion and the Section 933 exclusion on the federal side.

The IRS has increased scrutiny of Act 60 residency claims, with recent case activity and Chief Counsel Memoranda confirming that the agency challenges the 183-day presence test, tax home placement, and the sourcing re-characterization of gains through pass-through entities.

What are the IRC Section 937 bona fide residency requirements?

To qualify as a bona fide Puerto Rico resident under IRC Section 937(a) -- and thus be eligible for both the Section 933 exclusion and the Act 60 decree benefits -- an individual must satisfy all three of the following tests simultaneously for the taxable year:[3][4]

In the year of the move, IRS Publication 570 provides a partial-year safe harbor: the taxpayer need not have satisfied the tests for the full calendar year, provided the conditions described in the year-of-move rules above are met. U.S. citizens who meet the threshold of USD 75,000 in worldwide gross income in the year they begin or end Puerto Rico residency must file Form 8898 (Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Territory) by the due date of their Form 1040 for that year; failure to file carries a USD 1,000 penalty.[4]

Individuals considering a move to Puerto Rico for capital-gains purposes should evaluate their specific unrealized gain positions, the composition of their portfolio, and the practical demands of genuine bona fide residency well in advance of any relocation. A qualified tax professional with active Puerto Rico CPA licensure and experience coordinating Hacienda filings with IRS Form 1040 and Form 8898 compliance is essential for this analysis. TaxPros Rated lists credentialed practitioners by jurisdiction, including those serving Puerto Rico clients and cross-border U.S.-territory filers. For a broader overview of the Puerto Rico tax environment, see the Puerto Rico country overview.