With all the attention on the cryptocurrency industry thanks to the collapse of FTX, we thought it would be a great time to examine what if any similarities there are between crypto and cannabis.
The cryptocurrency and cannabis industries have a lot in common. For one, both are among the fastest growing sectors in the world right now. But at the same time, they are also highly regulated and operate in a legal grey area. This has led to these industries encountering similar challenges, particularly when it comes to banking and tax issues.
Despite being legal in many parts of the world, the cannabis industry is still largely cash-only due to the fact that banks are reluctant to work with them. This is because banks are federally regulated, and cannabis is still illegal at the federal level in the United States. This lack of banking options creates many problems for cannabis businesses, including the difficulty of paying taxes.
Cryptocurrency is facing similar issues. Since cryptocurrency is primarily operating outside of the scope of federal and international regulation, many banks are unwilling to work with businesses that deal in it. This makes it very difficult for businesses in the cryptocurrency industry to find banking options and pay taxes.
Due to the above restrictions in cannabis, many owners have looked to cryptocurrency as a possible solution. In this blog post, we’ll look at how cannabis business owners can overcome these challenges and what role cryptocurrency can play.
Tax Issues Facing Cryptocurrency And Cannabis
The problem with cryptocurrency being used as a substitute for fiat when purchasing cannabis is a double-edged sword. Bitcoin and others are not seen by the U.S. Government as fiat. It is not a readily available commodity that can be taken from an ATM or the local bank branch. An individual will find the process of taking a fractional Bitcoin to purchase a soda, then go to a local dispensary to buy a tincture or joint impossible.
The issue is that at every transaction point, the exchange must be tracked because it is, at the time of this writing, a commodity. A stock can be bought and sold. It is not fiat. It faces long and short-term capital gains treatment under §1201 et seq. Buy a fractional interest today, trade it in for cash in your bank account tomorrow when it has gone up by $5 in value in order to buy a pizza and soda at a local shop.
So, while it may be tempting to turn to Bitcoin or some other cryptocurrency to overcome the banking hurdles faced by cannabis businesses, for many owners, the similar issues plaguing crypto may prove…
…More Trouble Than It’s Worth?
One of the largest problems facing any cannabis related company considering taking cryptocurrency as payment for goods and services is the record keeping. In addition to the already stringent bookkeeping needed for a cash business to stay in compliance with state and local regulators, managing the acceptance of cryptocurrency will create a new set of challenges.
As stated earlier, cryptocurrency in the United States is currently treated as an asset and not as fiat. Because of this, there are certain tax reporting requirements that are still unclear with both the federal government and state tax authorities.
Being treated akin to a stock that faces long or short-term capital gains is huge consideration businesses must consider. Using the above examples, if a business accepts cryptocurrency on a Friday, then converts the same to cash and deposits it into a bank account on Monday, the short-term gain (or loss) is obvious. Problems, however, will begin to develop when attempting to calculate the amount of gain or loss.
There are approximately five different cryptocurrency exchanges with prices that change by the minute. The American Institute of CPAs wrote a letter to the IRS* to inquire about the correct exchange that should be used in calculating gains or losses, as well as what time of day the calculations should be made, because unlike traditional stock exchanges that close at a set time every day, cryptocurrency exchanges are open all the time. The American Institute of CPAs never received a formal response from the IRS.
*AICPA letter to the IRS regarding Notice 2014-21 dated 10 June 2016; inquiring about acceptable[LD1] documentation and valuation for cryptocurrency, how to determine exchange rates based upon supply and demand, whether or not expenses incurred while attempting to obtain cryptocurrency is deductible (i.e. mining), rules surrounding FIFO, guidance on property transactions overall, or if the cryptocurrency is held by a merchant – which in these examples would negatively impact cannabis companies that are not afforded the same tax benefits, protections, etc. as “traditional” businesses, how charitable donations should be considered, whether or not cryptocurrency is actually a commodity, if it is deposited into retirement accounts, etc. At this time, the IRS still has yet to reply to the request for information.
Practical advice would then presume that the accountant for a cannabis company choose one exchange to use when converting any cryptocurrency assets, as well as use a routine time every day when the conversions should take place.
How Can Cannabis Companies Get Fair Market Value For Crypto Assets?
As already noted, cryptocurrency prices are constantly in flux. Cannabis businesses are also taking a calculated risk regarding the fair market value of their goods and services and getting the best return by accepting cryptocurrency as payment. While the price of said goods may be sold for $40 cash, if the equivalent of $40 in cryptocurrency is accepted, will it retain its value when the company attempts to convert it into cash?
Using the above example, there is a real concern at this point if a company takes in $40 for goods and accepts the equivalent of $40 in cryptocurrency as payment, the cryptocurrency may only be worth $20 when it attempts to convert its cryptocurrency for cash. Because cannabis-based companies are prohibited from writing off losses the way many traditional businesses are, the question then is if they are allowed to recognize the $20 loss they suffered – not including the $20 in loss they would have to recognize as either short or long-term capital loss in the transaction.
This makes dealing in cryptocurrency an extremely risky prospect, a level of risk that cannabis business owners will probably want to avoid as they already are faced with enough volatility in their own industry.
What Are The Tax Implications Of Investing In Cryptocurrencies?
If you are a cannabis business owner, you are likely already familiar with the tax implications of working in cannabis (and if you aren’t, Indiva Advisors can help!). But what about the implications for dealing in crypto?
Investing in cryptocurrencies can be a lucrative way to earn money, but it's important to be aware of the tax implications before you start buying and selling. In the United States, the IRS has stated that cryptocurrencies are treated as property, which means that capital gains tax applies to any profits you make from buying and selling them.
If you're not careful, you could end up owing a significant amount of money in taxes on your cryptocurrency earnings. So, before you start investing, be sure to educate yourself on the tax implications and consult with a financial advisor or cannabis accountant who’s also familiar with crypto to ensure that you're taking all the necessary steps to stay compliant.
Partner With Indiva Advisors, LLP
In conclusion, the relationship between cryptocurrency and the cannabis industry is a complicated one. Cryptocurrency is increasingly being used to buy and sell cannabis, but it is also a volatile and unregulated market. Before jumping in, you should consult with an experienced cannabis accountant to better understand how your business will be impacted.
Cannabis companies can avoid any surprises come tax time by partnering with Indiva Advisors. We specialize in cannabis compliance. Get in touch today to schedule a free consultation.