Organisers of the Tiree Music Festival (TMF) said the impact of the pandemic on transport operators and uncertainty over what events can go ahead this summer had made it "impossible" for them to plan ahead for this year.
They have urged ticket-buyers to help ensure the event "survives" in future by agreeing to transfer their booking to the 2021 event.
The 2020 festival, which has a capacity of 2100, sold out in November just weeks before TMF was named event of the year at the annual Scots Trad Music Awards.
The three-day event, which was expected to attract fans from the United States, Germany, New Zealand and the United Arab Emirates this year, was expected to be worth more than £1 million to the local economy.
Founded by local musician Daniel Gillespie, who play with the band Skerryvore, the festival had previously notched up 11 consecutive sell-outs and attracted acts like The Fratellis, Dougie MacLean, Sharon Shannon, The Levellers, Capercaillie, Sandi Thom and Eddi Reader to Tiree.
The festival's announcement was made days after the Scottish Government ordered that ferries must only be used for "essential travel" to protect island communities from the pandemic.
West coast operator Calmac last week announced that it was stopping taking advance bookings on all of its services before 15 July - several days after the festival was due to take place in Tiree. The Mull Music Festival, which was due to be held next month, had already been called off.
A statement from TMF said: "It is with a very heavy heart that we must confirm that TMF 2020 will be cancelled due to the COVID-19 pandemic.
"Up until the past few days we were still in strong hope that we would progress with TMF 2020 as planned.
"However with the impact of the pandemic on the travel operators to the island and the uncertainty around restrictions on gatherings and events, this sadly means it will be impossible to plan and manage the audience numbers that attend the event.
"As always, our priority is ensuring TMF is a safe, family-friendly event and sadly this can’t be guaranteed under the current restrictions.
"After an incredible 10th anniversary event we didn’t think your support could be any stronger but to see a record sellout of the 2020 festival by November 2019 once again highlighted why our small Scottish festival has the best audience in the world.
"So our commitment to those that purchased tickets is that their ticket automatically transfers to TMF2021.
"By committing to the 2021 festival you are ensuring TMF survives and can continue the legacy of the first 10 years - our heartfelt thanks to all that are able and willing to do so.
"We please ask for patience on refund requests as this is obviously an exceptional situation that has rocked our event and the entire world to their knees.
"We have no full-time staff So it will take us considerable time to manage all the administration on top of negotiating existing contracts, deposits and sponsors."