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The Puerto Rico Treasury Department (PRTD) issued guidance (Administrative Determination (AD) 23-03) on the obligation to report foreign financial accounts, including calculating the maximum amount in a foreign financial account and clarifying the definition of crypto assets.

Calculate maximum

To calculate the maximum value a foreign financial account had during the calendar year, taxpayers should first determine the maximum value of the account in the functional currency of that account. If there is more than one foreign financial account, taxpayers should determine the maximum value of each account separately. If an account has non-cash assets or a combination of cash and non-cash assets, taxpayers should make a good faith approximation of the highest value during the calendar year. Taxpayers can use the account or bank statements to determine the maximum value of the assets in the foreign financial account during the tax year.

After determining the maximum value in functional currency, taxpayers should convert that amount to US dollars. To convert to US dollars, taxpayers should use the exchange rates published by the US Treasury Department's Financial Management Service on the last day of the calendar year. If the Financial Management Service does not publish rates for the functional currency of the foreign financial account, taxpayers should use the exchange rate of the recognized market. Taxpayers who use the exchange rate of the recognized market should maintain records as evidence of the rate used in case the PRTD requests the information.

If a taxpayer cannot determine the foreign financial account's maximum value, the taxpayer should complete the "Annex Foreign Financial Account" to report that the taxpayer is unable to determine the value. The taxpayer should keep records showing the reasons the taxpayer was unable to determine the value.

Crypto assets

AD 23-03 clarifies that "crypto assets" means all digital goods or rights for which blockchain is used to verify transfers or maintain records. "Crypto assets" include crypto currency, virtual currency, stablecoins and nonfungible tokens. An account with crypto assets will be treated as a foreign financial account, unless the account is maintained on an exchange or by a custodian regulated by the US Government. "Wallets" (cold or hot storage) are foreign financial accounts unless they are "guarded" by the taxpayer or a third party in Puerto Rico or the United States.

If an account is maintained on (1) an exchange not regulated by the United States or (2) a decentralized exchange, the taxpayer should report the account on the "Annex Foreign Financial Account."

To determine the maximum value of the account with the crypto assets, taxpayers should use the procedure for calculating the maximum value of a foreign financial account. Taxpayers should convert the highest value of the crypto assets during the tax year to US dollars by using the conversion value of the assets shown on an exchange regulated by the US Government at 11:59 pm in Puerto Rico on December 31 of the year in which the taxpayers must report the account. If the taxpayer uses an exchange that does not provide a value at that time, the taxpayer may use the value at the closing time of the exchange used. If the assets are not found on an exchange regulated by the US Government, the taxpayer should use an exchange recognized at the international level. The taxpayer cannot use a decentralized exchange to determine the value of the assets.

Taxpayers should report crypto assets that cannot be converted to US dollars on the "Annex Foreign Financial Account."

Other provisions

AD 23-03 includes guidance on how married taxpayers should report foreign financial accounts. It also includes guidance on how to report foreign financial accounts for minors. Additionally, AD 23-03 lists the accounts that are not considered foreign financial accounts and clarifies that accounts maintained in US possessions or in financial institutions on military bases will not be treated as foreign financial accounts. Moreover, accounts where the taxpayer only has power to sign, without having a financial interest, are not considered foreign financial accounts when that authority is exercised as an officer or employee of the legal entity in which it does not have participation as an owner.

Generally, legal entities are not required to report foreign financial accounts. AD 23-03 clarifies when the reporting requirement applies to a legal entity.

Implications

The obligation to report foreign financial accounts was introduced under Act 52 of June 30, 2022. AD 23-03 provides welcome guidance on critical compliance aspects of this new requirement as well as types of accounts that are not subject to the reporting requirement.

Puerto Rico resident individuals with accounts held outside of Puerto Rico or the United States with a balance over $10,000 during the tax year are advised to pay close attention to this new requirement, as failure to comply could result in steep penalties and a misdemeanor charge.

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor