Despite the success of the U.S. legalization movement, marijuana banking issues can be so crippling that even a toke of the the most potent strain can’t ease the pain.
Marijuana legalization has steamrolled through 28 states and the District of Columbia, and the movement has led to soaring approval ratings for legalization, according to Quinnipiac University polls on the issue.
The patchwork of different state regulations on medical and recreational marijuana; the adversity of existing federal law, which still puts pot in the same category as heroin; and the threat of a potential axe drop by a reactionary U.S. Justice Department are all handicaps for marijuana producers who want to grow their market. Furthermore, Attorney General Jeff Sessions has shown no signs of stopping his crusade against cannabis.
Adding to those concerns are the less obvious financial problems that legal pot growers and retailers face, including the lack of marijuana banking services, or ability to take advantage of normal business tax breaks for wages, expenses and repairs.
As a pot grower, generating capital on the open market is a pain, too. Unless you’re a big pharma company, forget going public on the New York Stock Exchange or NASDAQ. You’re stuck selling shares on the more obscure over-the-counter markets that deal in penny stocks. And it’ll be difficult to hope for more than pennies per share for your weed company when the regulatory environment in the industry is so precarious.
Marijuana Banking: Can you put your marijuana money in the bank?
The biggest financial impediment comes from a dearth of marijuana banking services for pot growers and retailers. Banks, since the catastrophic bank runs of the Great Depression, have their holdings insured by the Federal Deposit Insurance Corporation (FDIC).
Because of the FDIC, you can be sure that if a financial crash happens, you can (more or less) still pull your money out of the bank where you have it deposited.
But the FDIC is a creature of federal law, which also states that marijuana is a Schedule I controlled substance under the U.S. Controlled Substances Act. This means that banks and credit unions theoretically stand to lose their FDIC insurance if they handle marijuana industry money.
According to analysis by the Pew Charitable Trusts think tank, 40 percent of legal marijuana operations in Colorado had no marijuana banking accounts as of October 2016, four years after voters legalized the drug for production and sale.
How do the feds tax marijuana when it’s illegal?
Another hindrance is the fact marijuana producers can’t take advantage of federal tax breaks available to most businesses because, as part of the 1970 Controlled Substances Act, (which added Section 280E to the tax code) you can’t take tax breaks on income from trafficking in illegal drugs as scheduled in the act.
Did you know that the U.S government holds a patent on the use of cannabinoids as an antioxidant? How that can be the case at the same time that it is a Schedule I substance with “no medical value” is beyond us.
The Internal Revenue Service’s Office of Legal Counsel released a memo in 2015, one of several to clarify how the agency can collect tax on legal marijuana business. After several pages of convoluted legal history and reasoning, the document states that marijuana farmers can take advantage of some common tax breaks, but retailers and marketers are stuck with a much bigger tax bill than even a liquor store or tobacco outlet.
Tax codes like 280e make it particularly difficult for businesses to claim traditional business expenses when the file taxes; they can only expense the cost of goods sold (COGS), but not their rent, staff, etc. This results in the need to pay taxes on much more than just profit — a protocol that cripples most marijuana related business.
“For example, a producer of a Schedule I or Schedule II controlled substance should be permitted to deduct wages, rents, and repair expenses attributable to its production activities, but should not be permitted to deduct wages, rents, or repair expenses attributable to its general business activities or its marketing activities,” according to the text of the IRS memo.
What are over-the-counter (OTC) markets?
Over-the-counter securities markets are different from centralized stock exchanges like NYSE and NASDAQ in that they rely on networks of dealers, which buy and sell securities for their own personal gain or their firms personal gain. This is as opposed to a broker, who buys and sells on behalf of clients.
OTC networks have less transparency and regulations. They’re typically the markets for penny stocks and host to all the potentially shady practices the term “penny stocks” conjures in the mind of a prudent investor. They typically have three tiers: OTCQX, OTCQB, and Pink (Pink Sheets).
For instance, after the 2012 legalization of recreational pot in Colorado, market watchers observed cannabis-related stocks soaring on the OTC markets, so much so that fly-by-night firms used legal chicanery to include “Cannabis” or “Marijuana” in the names of their LLCs to drive of share prices and scrape the cash before the so-called “Colorado effect” wore off and cannabis stocks plunged. This is according to a 2017 Forbes article.
So, though it’s possible and becoming easier to generate capital as a marijuana producer, it’s difficult to demand the kind of share prices a software or pharma company can, and even more difficult to build credibility among investors.
This may be changing however. In late 2016, the NYSE dipped its storied toe in the pot-laced waters by listing a real estate firm dealing exclusively with indoor cannabis growers. The company is only indirectly part of the industry and handles no bud itself, but its listing could indicate a softening of the big exchanges’ stance on the cannabis industry.
MARIJUANA BANKING REFERENCES:
“5 Things For New Investors To Know Before Investing In Marijuana Stocks”
“NYSE Becomes First Major Exchange To List Cannabis Company With Acceptance Of REIT IPO”
“Why Marijuana Businesses Still Can’t Get Bank Accounts”
Stateline, a research and analysis blog run by the Pew Charitable Trusts
U.S. Code § 280E – Expenditures in connection with the illegal sale of drugs
Memo Number: 201504011
W. Thomas McElroy, Jr., Senior Technician Reviewer
U.S. Internal Revenue Service Office of Associate Chief Counsel (Income Tax & Accounting)
“Marijuana Stocks Are Doomed if Trump Reneges on His Pot Pledge”
The Motley Fool
“The Truth About Investing in Marijuana Stocks”
The Motley Fool
“How to pick the right marijuana stocks”
Viridian Cannabis Stock Index March 31, 2017 Performance Report
Viridian Capital Advisors
Cannabis Stock Index Criteria
Viridian Capital Advisors
U.S. Voter Support For Marijuana Hits New High
Quinnipiac University Poll
April 20, 2017