IRS AND BANKING RULES REDUCE POT INDUSRY PROFITS

Unless Congress changes the laws, investing in the marijuana industry is not a good bet

Medical marijuana growers and distributers have become instant multi-millionaires and the same holds true for licensed growers and distributors in states that have legalized recreational pot. However, according to The Motley Fool, an investment adviser, investing in marijuana is playing with fire.

The proponents of pot promised that legalization would drive the illegal trade out of business, but local unlicensed growers and distributors, as well as the Mexican drug cartels, are doing more business than before the legalization of marijuana because potheads prefer to purchase the weed tax free.

And the illegal drug industry does not have to bother with IRS and banking rules that cut down on the profits of the legal pot industry.

From The Motley Fool:

Two key rules that are in need of change by Congrss if the marijuana industry hopes to thrive.

To begin with, U.S. tax code 280E prevents businesses that deal in illicit substances from taking normal business deductions. Since marijuana is still illegal on a federal level, and federal tax law supersedes state tax law, marijuana businesses are stuck with an exceptionally high tax burden. Unless Congress changes this, marijuana businesses will more than likely struggle to net substantial profits, which could hamper their expansion efforts and/or their ability to hire or buy more product.

The other issue here is that banks, in general, want next to nothing to do with the marijuana industry. Of the roughly 6,700 banks in the U.S., only around 3% are actively offering banking services to marijuana-based businesses. There are simply too many rules and regulations to follow relating to the marijuana industry for banks to be actively engaged. Worse yet, if the federal government decides at some point to reinstitute federal law over each state, banks could be found liable for money laundering. It's a risk many banks would just as soon not take.

With little access to basic banking services and a brutally high tax rate, the marijuana industry is not guaranteed to survive over the long run if Congress doesn't change its stance on the drug. It's for this reason that I'd suggest that whether you're for, against, or neutral on marijuana's nationwide legalization, you should stick to the sidelines as an investor. Without a clear long-term outlook, investing in marijuana is playing with fire.