Can you sell legal cannabis for cryptocurrency?

We all know that the biggest issue of the cannabis industry is the lack of banking. Not all cannabis businesses can get business bank accounts. Can crypto payments solve your banking problem?

The short answer is: it's complicated and may not be worth your effort.

Allow me to start by explaining how cryptocurrency is taxed. In the eyes of the IRS, cryptocurrency is an asset, pretty much just like a stock. And the IRS asks you to account for your crypto accordingly. Every time you exchange crypto for services, cash, goods, or another crypto, you create a taxable transaction and the IRS wants to know everything about it. For example, you sold $100 worth of cannabis and received your payment in Bitcoin. Thirty days later, your Bitcoin value went up to $200, and you decided to cash it. Hooray! You made 100 dollars. Well, surprise-surprise, you have to pay tax on your capital gain.

Even if you didn't make any profit by selling or exchanging crypto, you still have to report your crypto activity to the IRS. And if you don't report it, you will violate the IRS regulations, and who knows how it can all turn out.

There are two ways you can handle crypto at your cannabis dispensary.

The first one is to sell cannabis for crypto and keep crypto as an investment in your wallet or a payment platform. I've seen dispensaries using Bitcoin Cash Register to collect their payments and later keeping Bitcoin in their wallets or converting it to Stablecoins, Etherium, and so on. There are several problems you are facing with this type of arrangement:

1. Your crypto is subject to volatility, and you may lose or gain on this type of arrangement.
2. You have to account for capital gains to the IRS. If you ever decide to exchange your crypto for cash or another crypto, this would have to go on a payment platform, such as Coinbase. Coinbase is a regulated financial institution, and in 2018 and 2019, it issued 1099K forms to many unsuspecting investors, which got them in trouble with the IRS. Coinbase promised not to issue any forms for 2020, but who knows, things may change in the future. So, if you don't want to get your dispensary in trouble, you would have to be proactive and report to the IRS your capital gains and losses voluntarily.
3. You still need a business bank account to withdraw your cash from a payment platform. Cannabis dispensaries would have to use a personal account, which is tied to someone's social security number. So, the person who ends up withdrawing cash will be the one carrying personal liability in case the IRS audit should arise. Also, If the amounts of withdrawn cash are large, the bank could file a suspicious activity report to the IRS for the bank owner.

What about paying in crypto for goods and services? Can you collect crypto from customers and later send the same crypto to pay your suppliers? All of these transactions happen in private wallets and do not show up on heavily regulated exchange platforms. Yes, of course, you can have an arrangement like that. However, the exchange of crypto for goods would still be considered a reportable capital gain transaction. The only difference here is that, for now, the IRS does not scrutinize transfers between private wallets. However, there are blockchain explorer softwares that can track any single crypto transaction. In addition, the IRS can always subpoena your business partner, who will have to show all of their transactions and your activity will be disclosed.

4. You need to hire a tax crypto account to reconcile your crypto transactions for the IRS. Your Accounts Payable clerk won’t be able to handle this type of accounting. You would have to hire an accountant who specializes in crypto taxation, and those guys are not cheap. Reconciliation of all crypto activity is a headache, and it is an additional expense that you will incur by deciding to accept crypto.

There is another option for how cannabis shops can use crypto for payments.

Cannabis dispensaries could use such processing platforms as BitPay to take crypto and instantly convert crypto back to cash. By instantly converting crypto to cash, you would avoid volatility and solve the capital gains problem described above. Now crypto does not sit in your wallet and does not fluctuate. You don't need to reconcile your crypto activity, hire an expensive crypto tax accountant, and report capital gains to the IRS. But the major problem with this situation still stays the same: your cannabis dispensary does not have a business bank account to withdraw the money from. The money would have to be withdrawn through a personal bank account, and the bank owner personally would be at risk for receiving a 1099K from the crypto payment processor. BitPay will issue 1099Ks to merchants that receive payments of more than $20,000 in gross volume and more than 200 separate payments in a year. On top of that, the bank itself could issue the IRS form 8300 for suspicious banking activity.

As you can see, legal cannabis can be bought and sold with crypto. But if you want to do it right and be in compliance with the IRS, you have to incur additional expenses and headaches. Selling cannabis for crypto does not solve your banking problem.

Please let me know if you would like to discuss any other ideas on crypto cannabis transactions.