Even if your tax practice is not actively taking cannabis clients, chances are you have been asked to work with one. If it still has not come across your desk, it will not be long before you find yourself working with clients who are at least ancillary to the industry as it continues to be legalized in new states.
Cannabis banking continues to be a struggle, as Federal laws prohibit major FDIC-insured banks to work with cannabis. More and more owners are turning to creative strategies to avoid the proverbial “cash in the mattress” storage method. Physical cash on hand presents a unique set of risks outside of accounting challenges.
Cash is easily stolen, making cannabis operations susceptible to everything from petty theft from staff to being targeted for break-ins. Liability and property insurance typically have small cash limits on their policies leaving cannabis business owners with little risk assurance in this area.
As such, cryptocurrency has garnered increasing attention from those operating in the cannabis space. Crypto markets have remained largely unregulated, meaning they carry their own version of risk.
But currencies like Bitcoin have started establishing worldwide ATM locations, which would allow cannabis business operators to safely deposit their physical cash and turn it into cryptocurrency.
As the crypto world progresses, it is also now easier for crypto owners to make regular everyday purchases using their MetaMask wallets.
The downsides to cryptocurrency still include the lack of regulation in the market, the potential for volatile pricing, and the lack of record-keeping, especially if the currency is being used for business purchases.
We highly recommend that cannabis business owners do their research prior to using crypto as a cash solution.
Crypto also comes with a unique set of tax rules that don’t necessarily mirror traditional investment funds. For example, cryptocurrencies are prone to “splits,” meaning you may receive coins in one currency just for holding coins in another. These “splits” are required to be reported for tax purposes in the year they are received regardless of whether they are cashed out.
We highly recommend speaking with a tax professional versed in crypto-currency transactions before filing your tax returns to ensure you do not misreport your transactions.
With legal cannabis still feeling far away from passing through the Senate, and Federal banking for the industry seeming the same, we expect crypto to continue to build a loving relationship among cannabis business owners over the next year. What that means for your tax practice is being prepared.
Crypto has some unexpected tax rules when it comes to the timing of recognizing gains. For example, ownership of one type of coin often results in “splits” or bonuses when another coin opens. The receipt of new coins can trigger capital gains, essentially like a normal stock dividend.
Even staying out of the cannabis game, more clients are jumping into crypto, so staying on top of the tax law changes related to virtual currency will make your life easier during tax season and beyond.