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legal marijuana and federal income tax


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#1 D.Dude

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Posted 29 November 2012 - 10:55 AM

Law schoolish questions:

1. Assuming it's legal now to sell marijuana in Washington and/or Colorado (do the new laws legaize sales, or only use?), could a seller invoke the 5th amendment when filing federal income tax returns? Telling the government of your income (or loss) would tend to incriminate you, right?

2. If so, the income would be free of federal taxation. Would it be lucative to invest in such businesses?

#2 Tax_Counsel

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Posted 29 November 2012 - 12:30 PM

Law schoolish questions:

1. Assuming it's legal now to sell marijuana in Washington and/or Colorado...


Under the Colorado amendment passed by voters, the sale of marijuana would be legal under state law, subject to certain restrictions and taxes imposed by the legislature.


Law schoolish questions:

...could a seller invoke the 5th amendment when filing federal income tax returns? Telling the government of your income (or loss) would tend to incriminate you, right?


No. I'd advise a client in that circumstance to report the income, and use a general description of the business activity rather than stating specifically that it was marijuana sales. A taxpayer in that circumstance really should see a tax lawyer for specific advice. Note that here here a CPA or other tax pro would not do because the taxpayer needs the benefit of the attorney-client privilege.


2. If so, the income would be free of federal taxation.


No. Income from illegal activity is still taxable income and must be reported on the taxpayer's return and the tax paid or the taxpayer risks prosecution for tax evasion and/or large civil penalties. The U.S. Supreme Court made that clear many decades ago. It was the failure to report his illegal income from his mob activities that landed Al Capone in federal prison, not actually any of the mob activities themselves.


Would it be lucative to invest in such businesses?


Maybe. That's not a legal issue. It will not get you tax free income, however.

Furthermore, until the federal government's position on the issue changes, I'd recommend against it. Under current federal law, the penalties for selling marijuana can be stiff. The fact that the state no longer penalizes possession and sales of marijuana that conform to the state law still doesn't make it legal under federal law.


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