In a significant federal policy development, President Donald Trump has issued an executive order urging the Department of Justice to reclassify cannabis from Schedule 1 to Schedule 3 under the Controlled Substances Act. This proposal marks what observers call the most substantial federal cannabis policy change in over half a century.
Dan Ahrens, portfolio manager of the AdvisorShares Pure US Cannabis ETF (NYSE: MSOS), has highlighted the profound impact this reclassification could have on American cannabis companies, particularly concerning their tax obligations. Currently, cannabis remains classified alongside substances like heroin under Schedule 1, imposing stringent regulatory and fiscal constraints on operators despite legal state markets.
The Impact of Section 280E on Cannabis Operators
At present, cannabis businesses face a harsh tax provision known as Section 280E of the Internal Revenue Code. Because cannabis is federally illegal and classified as a Schedule 1 narcotic, legal businesses cannot deduct ordinary business expenses from their federal taxes. Ahrens explained that companies under this regime are effectively treated as "narcotics traffickers" by tax authorities.
This restriction means cannabis firms cannot deduct essential costs such as payroll, rent, and mortgage expenses, leading to severely constrained profitability and cash flow. The inability to offset these expenses has been described by industry participants as a crippling financial weight that hinders growth and stability.
Shifting to Schedule 3: A Potential Tax Game-Changer
Moving cannabis to Schedule 3 would categorize it alongside substances recognized for medical use, thus removing many of the punitive restrictions currently in place. Specifically, it would allow cannabis businesses to deduct normal operating expenses, fundamentally improving their balance sheets.
Ahrens described this change as an automatic lifting of the restrictive Section 280E tax burden. The ability to deduct business expenses would provide an immediate boost to cash flow, enabling companies to operate on a more sustainable financial footing.
Market Responses and Sector Volatility
The cannabis market, which has shown robust performance in 2025—with the AdvisorShares MSOS ETF reportedly outperforming the S&P 500—has reacted to the news with cautious optimism. However, Ahrens warns that the sector remains one of the most volatile investment environments, shaped by years of unfulfilled political promises.
He characterized recent years as a "quagmire" for the industry, with many institutional investors hesitant to commit significant capital pending clear and enforceable federal reforms. Despite the optimism following the executive order, Ahrens notes that this is merely the initial phase of a longer regulatory evolution.
Challenges Persist Despite Rescheduling Proposal
Even if rescheduling is implemented, Ahrens identified ongoing hurdles. Notably, U.S. cannabis companies have yet to gain access to major stock exchanges such as NASDAQ or NYSE, opportunities currently available to many Canadian cannabis firms. This limits liquidity and access to broader investment pools.
Moreover, uncertainties remain in regard to banking. The industry continues to await "safe harbor" provisions that would clarify and secure banking relationships. Without clear guidance, cannabis operators face continuing difficulties managing financial transactions and accessing banking services.
Ahrens cautioned investors to anticipate continued market fluctuations as governmental bodies work through the complexities of delineating medical and adult-use cannabis programs under the revised federal classification.
Cannabis Stocks and ETFs to Watch
| Ticker | Company | 6-Month Performance | Year-To-Date | 1-Year Performance |
|---|---|---|---|---|
| TLRY | Tilray Brands Inc. | 40.28% | -2.73% | -19.19% |
| ACB | Aurora Cannabis Inc. | -10.00% | -2.53% | 8.46% |
| SNDL | SNDL Inc. | 1.90% | -7.47% | -8.52% |
| CGC | Canopy Growth Corp. | 6.25% | 4.39% | -46.64% |
| MSOS | AdvisorShares Pure U.S. Cannabis ETF | 68.55% | -0.42% | 35.13% |
Note: These performance figures illustrate recent market volatility and the varied impacts of federal and state regulatory environments on cannabis equities and funds.