The marijuana industry has seen exponential growth over the past few years. However, the federal prohibition of marijuana poses significant challenges for businesses in this sector, in terms of payment processing and banking. As explained in a previous article, cryptocurrencies present a potential solution to these issues, enabling marijuana businesses to send and receive payments without the need for third-party intermediaries.
Although emerging technologies always carry regulatory risks, the risks associated with cryptocurrency payments are substantially lower in the payment context. This is particularly true when compared with other cryptocurrency use cases. However, for businesses that accept cryptocurrency payments, the tax implications remain a substantial barrier to adoption. To solve this problem, several technology platforms have emerged, which could allow marijuana businesses to begin seamlessly accepting payments in cryptocurrency.
The Tax Code Is a Significant Barrier to the Adoption of Cryptocurrency Payments
In general, many different legal frameworks can apply to cryptocurrency transactions. Due to Congress’ failure to enact a comprehensive regulatory regime, cryptocurrencies lack a uniform definition or treatment under domestic law. As a result, the law has treated them as money, funds, investment contracts, property, and as means of payment, depending on the context of the cryptocurrency’s use. These classifications, in turn, have led to the application of various statutes and regulations, such as federal and state securities, commodities, and anti-money laundering laws. Given this, it is understandable that there is a perceived regulatory risk associated with cryptocurrencies.
In the context of accepting payments for goods, however, the range of applicable laws is fairly narrow. Arguably, the most consequential laws for businesses accepting cryptocurrency are the Internal Revenue Code and Internal Revenue Service (IRS) regulations. In March 2014, the IRS announced that it views transactions in cryptocurrencies as involving the sale and exchange of ordinary property, meaning that ordinary income is recognized on any gain. See I.R.S. Notice 2014-21, 2014-16 C.B. 938.
The implication of the IRS’ guidance is that businesses accepting cryptocurrency payments must meticulously record the fair market value of the cryptocurrency at the time of receipt, and when converted into traditional currency, any fluctuations in value will be recognized as a gain or loss. The current tax regime thus creates an accounting and tax burden that restricts cryptocurrency adoption, in many cases.
Payment Platforms Solve the Tax Problem
Technology companies have developed specialized payment platforms to address the challenges of using cryptocurrencies in the marijuana industry. These platforms offer several key features to circumvent potential tax issues related to cryptocurrency payments:
- Instant Conversion: The platforms instantly convert the customer’s cryptocurrency payment into traditional currency, settling the funds in the merchant’s bank account the following business day. This shields merchants from the risk associated with fluctuating cryptocurrency prices and prevents merchants from realizing a capital gain or loss.
- Reduced Cryptocurrency Retention: In addition, by instantly converting cryptocurrencies into traditional currency and settling the funds into a merchant’s accounts, these platforms eliminate the need for merchants to retain large amounts of cryptocurrency.
- Instant Confirmation: As an added benefit, the platforms provide instant confirmation for transactions, essentially guaranteeing payment for the merchant and eliminating the risk of chargebacks. However, because the cryptocurrency payments are instantly converted into cash, refunds are best handled by returning cash directly to the customer.
While the marijuana industry faces unique challenges due to federal prohibition, cryptocurrencies and the technology platforms that support them offer potential solutions, particularly in the realm of payment processing. By understanding and navigating the regulatory landscape, and leveraging the benefits of these technology platforms, marijuana businesses can mitigate risks and capitalize on the opportunities presented by cryptocurrencies.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.