Farmers across St. Croix, St. Thomas and St. John who were forced to sell qualifying livestock because of drought may receive additional time to replace those animals without immediately paying income tax on gains from the sales, under federal tax guidance that includes all three islands as drought-affected areas in 2026.
The Internal Revenue Service included the territory in Notice 2026-54, issued September 15 and published in its October 13 Internal Revenue Bulletin. The determination covers areas that experienced severe, extreme or exceptional drought during the 12 months ending August 31, 2026. The Virgin Islands had been omitted from the corresponding 2025 list, although all three islands were included in 2024.
The provision allows eligible livestock producers whose four-year replacement periods would otherwise expire in 2026 to receive additional time to rebuild their herds while continuing to defer the recognition of qualifying taxable gains.
The announcement comes as drought conditions across the Virgin Islands continue to deteriorate. The latest federal assessment, issued October 8, placed St. Thomas under Exceptional Drought, or D4, the most severe classification, while St. Croix and St. John remained under Extreme Drought, classified as D3.
Farmers throughout the territory have reported livestock deaths, depleted ponds, deteriorating grazing conditions and increasing expenses for animal feed and water.
How the Tax Relief Works
Under Section 1033(e) of the Internal Revenue Code, farmers who must sell livestock because of drought or other qualifying weather-related conditions may be permitted to postpone recognizing gains from those sales if they acquire suitable replacement animals within a prescribed period.
The provision applies to livestock held for breeding, dairy or draft purposes, including qualifying breeding cattle, sheep and goats. To qualify, the animals must have been sold because of the drought, and the number sold must exceed what the farmer would ordinarily have sold under normal business practices.
Animals raised for slaughter or sporting purposes are excluded, as is poultry. Livestock that dies during a drought is not covered by this particular sales-related provision simply because the death resulted from dry conditions.
Under ordinary circumstances, the replacement period is generally two years. When the weather-related conditions result in an area being designated as eligible for federal assistance, that period increases to four years.
The IRS may extend the deadline further when qualifying drought conditions persist.
For farmers whose four-year replacement period was scheduled to expire at the end of 2026, the latest notice extends the deadline until the end of the first taxable year following the first drought-free year for the applicable region.
For example, a farmer operating on a calendar-year tax basis who made a qualifying drought-related livestock sale in 2022 would ordinarily face a replacement deadline at the end of 2026. If the farmer meets the requirements for the additional extension, the deadline may move beyond this year.
The IRS determines whether an area has experienced a drought-free year by examining the 12-month period ending August 31. A year is not considered drought-free when severe, extreme or exceptional drought has been recorded in the applicable region during any week of that period.
The tax treatment is not a direct payment, reimbursement or permanent exemption from all taxes on livestock sales. It permits qualifying gains to be deferred under the applicable replacement rules, with the amount of any gain ultimately recognized depending in part on the cost of replacement animals.
Farmers must be able to document the circumstances that forced the sales, the number and type of livestock sold, their normal business practices and their replacement purchases.
Drought Continues to Threaten Livestock Production
The federal tax determination follows months of worsening agricultural conditions in the Virgin Islands.
According to the October 8 drought update issued by the National Oceanic and Atmospheric Administration and its federal and territorial partners, producers across all three islands are contending with extremely dry soils, limited forage and ponds that have dried up or fallen to critically low levels.
Some farmers have reportedly paid approximately $450 for deliveries of 5,000 gallons of water, while hay has been selling for $30 to $35 per bale.
On St. Thomas, farmers have reported continuing livestock losses, with some producers reducing their herds and separating male and female animals as they attempt to manage limited resources. Agricultural water shortages have been compounded by the Department of Agriculture's inability to provide hay-baling services in the St. Thomas-St. John district because of equipment shortages.
On St. Croix, producers have reported losses involving sheep, goats and cattle, while insufficient forage and depleted soil moisture continue to affect livestock operations. Farmers on St. John have similarly reported livestock and poultry losses, dried-up ponds and increasingly difficult growing conditions.
The October assessment also warned that drought conditions were expected to persist through the remainder of 2026, with below-normal rainfall continuing to threaten agricultural production.
The livestock tax provision is separate from the federal agricultural disaster assistance made available earlier this year.
On August 20, the U.S. Department of Agriculture approved a drought disaster designation covering St. Croix, St. Thomas and St. John, allowing eligible agricultural producers to seek emergency loans through the Farm Service Agency.
Those loans may be used for qualifying recovery expenses, including livestock replacement, essential equipment and certain debt-related needs. Applications for that assistance are due April 23, 2027.
Unlike the USDA loan program, the IRS provision does not supply money to purchase animals. Instead, it gives qualifying farmers additional time to replace livestock sold because of drought without immediately recognizing the associated taxable gains.
What Farmers Need to Know
The Virgin Islands generally follows the federal income tax code under its mirror tax system, with qualifying local residents filing income tax returns through the Virgin Islands Bureau of Internal Revenue.
Farmers who previously sold breeding, dairy or draft livestock because of drought should review their eligibility under Notice 2026-54 and the applicable replacement rules, particularly if an existing livestock-replacement deadline would otherwise expire at the end of 2026.
The treatment of individual sales, the amount of gain that may be deferred and the required supporting records depend on each producer's circumstances.
The IRS provides additional guidance in Publication 225, the Farmer's Tax Guide. Local producers may also consult the Virgin Islands Bureau of Internal Revenue or a qualified tax professional regarding the application of the provision to their territorial income tax returns.
