Cannabis Stocks Trade Mixed as Trump Signs Executive Order to Reclassify the Drug

Cannabis Stocks Trade Mixed as Trump Signs Executive Order to Reclassify the Drug

President Trump signed an executive order asking the U.S. government to reschedule cannabis. This move is considered by analysts and industry executives to be the most significant federal reform on the substance in decades. The reclassification could fundamentally alter the legal and regulatory landscape for the cannabis industry, impacting federal and state policies, public finance, and large-cap industry actors (source: MarketWatch.com).

Context & What Changed

The United States federal government has historically classified cannabis as a Schedule I controlled substance under the Controlled Substances Act (CSA) (source: dea.gov). This classification, reserved for drugs with a high potential for abuse and no currently accepted medical use, has placed cannabis in the same category as heroin and LSD (source: dea.gov). This federal stance has long been in direct conflict with a growing number of U.S. states that have legalized cannabis for medical or recreational use (source: ncsl.org). As of late 2025, a significant majority of states have enacted some form of cannabis legalization, creating a complex legal and regulatory patchwork across the nation (source: ncsl.org).

The executive order signed by President Trump on December 18, 2025, marks a pivotal moment in this long-standing federal-state dichotomy (source: MarketWatch.com). The order specifically directs the U.S. government, primarily the Drug Enforcement Administration (DEA) and the Food and Drug Administration (FDA), to initiate the process of reclassifying cannabis. This action is not an immediate reclassification but rather a formal instruction to begin the administrative review process. The most widely anticipated outcome of such a reclassification, if it proceeds as expected, is a move from Schedule I to Schedule III (source: author's assumption, based on prior HHS recommendations). A Schedule III classification signifies a drug with a moderate to low potential for physical and psychological dependence and an accepted medical use (source: dea.gov), placing it alongside substances like Tylenol with codeine or anabolic steroids (source: dea.gov).

The significance of this executive order cannot be overstated, with industry analysts and executives labeling it the “most significant federal reform on the substance in decades” (source: MarketWatch.com). The change, if implemented, would fundamentally alter the legal and operational environment for the cannabis industry, impacting everything from taxation and banking to research and interstate commerce. It signals a potential shift from a prohibitionist federal stance to one that acknowledges the plant's medical utility and economic potential, aligning federal policy more closely with the evolving views and laws at the state level.

Stakeholders

The reclassification of cannabis would have profound and varied impacts on a wide array of stakeholders:

Federal Government Agencies: The DEA and FDA are central to this process. The FDA is responsible for conducting a scientific and medical evaluation and making a scheduling recommendation, which the DEA then considers in its final scheduling decision (source: fda.gov, dea.gov). The Department of Justice (DOJ) would need to update its enforcement priorities and guidelines. The Treasury Department, particularly the Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service (IRS), would need to issue new guidance regarding financial transactions and tax compliance for cannabis businesses (source: fincen.gov, irs.gov). This would involve significant inter-agency coordination.

State Governments: States with existing medical or recreational cannabis programs would face the complex task of harmonizing their state laws and regulations with the new federal classification. This could involve adjustments to licensing, taxation, and enforcement frameworks. States currently considering legalization would likely accelerate their efforts, benefiting from clearer federal guidance. The potential for increased tax revenues and economic development would be a significant consideration for state public finance (source: taxpolicycenter.org).

Cannabis Industry: This sector, encompassing cultivators, processors, distributors, and retailers, stands to gain significantly. Current Schedule I status subjects cannabis businesses to Section 280E of the IRS tax code, which prevents them from deducting ordinary business expenses, leading to extremely high effective tax rates (source: irs.gov). Reclassification to Schedule III would likely exempt them from 280E, dramatically improving profitability and capital availability. Improved banking access, currently restricted due to federal illegality, would also be a major benefit (source: aicpa.org).

Financial Institutions: Banks, credit unions, and payment processors have largely shied away from serving cannabis businesses due to federal anti-money laundering laws and the risk of federal prosecution (source: fincen.gov). Reclassification would significantly de-risk these activities, potentially opening up mainstream banking services, loans, and investment capital to the industry. This would necessitate new compliance frameworks and guidance from federal regulators like FinCEN and the Federal Reserve.

Pharmaceutical Industry: A Schedule III classification would acknowledge cannabis's medical utility, potentially spurring increased research and development into cannabis-derived medicines. This could lead to new drug approvals and create both competitive and collaborative opportunities with existing cannabis companies (source: author's assumption).

Public Health Organizations: These groups would need to monitor the public health implications of increased access and potentially reduced stigma. This includes tracking rates of use, addiction, impaired driving, and youth consumption. They would advocate for robust public health campaigns, age restrictions, and product safety standards (source: cdc.gov, who.int).

Law Enforcement: Federal and state law enforcement agencies would need to adjust their priorities and resource allocation. While federal prohibitions on interstate commerce and recreational use would likely remain under Schedule III, the focus of enforcement could shift (source: author's assumption).

Consumers: Consumers could benefit from improved product safety standards, greater access, and potentially lower prices due to reduced tax burdens on businesses. However, concerns about increased access and potential public health impacts would also be relevant.

Evidence & Data

The current federal classification of cannabis as a Schedule I substance is well-documented by the DEA (source: dea.gov). This classification has historically hindered scientific research due to stringent regulatory requirements (source: nida.nih.gov). In contrast, 38 states have legalized medical cannabis, and 24 states have legalized adult recreational use, demonstrating a significant divergence from federal law (source: ncsl.org, as of late 2025). This state-level legalization has generated substantial tax revenues; for instance, California collected over $1.3 billion in cannabis tax revenue in fiscal year 2022-2023 (source: cdtfa.ca.gov), and Colorado has collected over $2.5 billion in total cannabis tax revenue since 2014 (source: colorado.gov/revenue). These figures highlight the significant public finance implications of a federally legal or reclassified cannabis market.

The impact of Schedule I on cannabis businesses is evident in their tax burden. Section 280E of the Internal Revenue Code prohibits businesses from deducting ordinary business expenses if they traffic in Schedule I or II controlled substances (source: irs.gov). This results in effective tax rates that can exceed 70% for cannabis companies, severely limiting their profitability and ability to reinvest (source: aicpa.org). A reclassification to Schedule III would exempt these businesses from 280E, dramatically improving their financial viability. For example, a hypothetical cannabis business with $10 million in revenue and $5 million in COGS and $3 million in operating expenses would pay taxes on $8 million under 280E, but only on $2 million if 280E were removed, assuming a 25% corporate tax rate (author's calculation based on IRS rules).

The illicit market for cannabis remains substantial, estimated to be comparable in size to the legal market in some regions (source: newfrontierdata.com). Federal reclassification, by reducing costs and increasing access to capital for legal businesses, could help to further displace the illicit market by making legal products more competitive on price and quality (source: author's assumption). The total U.S. legal cannabis market was estimated to be over $30 billion in 2023 and is projected to grow significantly in the coming years (source: grandviewresearch.com, statista.com). Reclassification could accelerate this growth, potentially adding billions in federal tax revenue annually if a federal excise tax were implemented, in addition to the removal of 280E (source: congressionalresearchservice.gov).

Scenarios

Three primary scenarios for the outcome of the executive order's directive can be envisioned, each with distinct implications for policy, finance, and industry:

1. Scenario 1: Reclassification to Schedule III (Probability: 60%)

Description: The DEA, following the FDA's scientific and medical evaluation and recommendation, moves cannabis from Schedule I to Schedule III. This is the most anticipated outcome given the executive order's directive and previous recommendations from the Department of Health and Human Services (source: author's assumption, based on public reports of HHS recommendations). Under Schedule III, cannabis would be recognized as having accepted medical use and a lower potential for abuse than Schedule I or II substances (source: dea.gov).

Impact: This scenario would immediately remove the burden of Section 280E for cannabis businesses, leading to significant improvements in profitability and cash flow. Banking access would substantially improve as financial institutions would be less exposed to federal anti-money laundering risks (source: fincen.gov). Research into cannabis would become easier due to reduced regulatory hurdles. However, interstate commerce would likely remain prohibited, as Schedule III still implies federal control over the substance, and federal recreational use would still be illegal (source: author's assumption). The FDA would gain increased oversight over medical cannabis products, potentially leading to new regulations for product manufacturing, labeling, and marketing.

2. Scenario 2: Delayed or Minor Reclassification (Probability: 25%)

Description: The DEA process faces significant delays, or the FDA's recommendation is less definitive, leading to a minor reclassification (e.g., to Schedule IV or V, which have even lower abuse potential but still imply federal control) or a prolonged period of regulatory uncertainty without a clear outcome. This could be due to scientific disagreements, political resistance, or legal challenges (source: author's assumption).

Impact: The cannabis industry would continue to operate under significant federal constraints, including 280E and banking restrictions. While some regulatory adjustments might occur, the fundamental challenges would persist, dampening investor confidence and limiting growth. State-federal conflicts would continue, and the illicit market would retain its competitive advantage. Public finance implications would be minimal, as no significant new federal revenue streams or cost savings for businesses would materialize.

3. Scenario 3: Full Descheduling (Probability: 15%)

Description: While the executive order specifically calls for reclassification, a more radical outcome could involve the complete removal of cannabis from the Controlled Substances Act, effectively descheduling it. This would typically require legislative action from Congress (e.g., the MORE Act) rather than just an executive order and administrative process (source: author's assumption, based on legislative history). However, some legal scholars argue for broader executive authority (source: author's assumption).

Impact: This would be the most transformative scenario. Cannabis would be treated like alcohol or tobacco, allowing for full federal legality, interstate commerce, and potentially a federal regulatory framework similar to the Alcohol and Tobacco Tax and Trade Bureau (TTB). This would unlock massive economic potential, attract significant institutional investment, and completely resolve the federal-state conflict. Public finance would see substantial new federal tax revenues, and the illicit market would be severely undermined. However, it would also necessitate a complete overhaul of federal and state regulations, potentially creating new complexities in the short term.

Timelines

The reclassification process initiated by the executive order is administrative and typically follows a structured timeline:

Immediate (December 2025): Executive order signed, formally directing the DEA and FDA to begin the review process (source: MarketWatch.com). The FDA has already reportedly completed its scientific and medical review and recommended Schedule III (source: author's assumption, based on public reports).

Short-term (6-12 months from EO): The DEA will review the FDA's recommendation, conduct its own legal and scientific analysis, and then publish a Notice of Proposed Rulemaking (NPRM) in the Federal Register (source: dea.gov). This NPRM will outline the proposed reclassification and invite public comments. A public comment period, typically 60-90 days, will follow (source: regulations.gov).

Medium-term (1-3 years from EO): After reviewing public comments, the DEA will issue a final rule. This rule would officially change cannabis's scheduling. Following this, federal agencies (Treasury, IRS, FinCEN, FDA) would need to issue detailed guidance and updated regulations to reflect the new classification. States would then begin the complex process of aligning their laws and regulations with the new federal framework, which could take several legislative sessions.

Long-term (3-5+ years from EO): The full economic and social impacts of reclassification would become apparent. This period could also see further legislative action in Congress, such as the passage of the SAFE Banking Act to explicitly protect financial institutions, or even broader descheduling efforts (source: author's assumption). International implications, particularly regarding UN drug conventions, might also require diplomatic engagement (source: author's assumption).

Quantified Ranges

While precise figures are subject to the final classification and subsequent regulatory frameworks, several quantified ranges can be estimated:

Tax Revenue Impact: The removal of Section 280E could save the U.S. cannabis industry billions of dollars annually in federal taxes. Estimates suggest that if cannabis were treated like a normal business, federal tax revenues could increase by an additional $5 billion to $10 billion annually through corporate income taxes and potential federal excise taxes, assuming a mature market (source: congressionalresearchservice.gov, taxpolicycenter.org, author's calculation based on market size). State tax revenues, currently in the billions, would likely continue to grow, potentially accelerating with federal clarity (source: taxpolicycenter.org).

Market Size & Growth: The U.S. legal cannabis market, currently valued at over $30 billion annually, is projected to reach $70-$100 billion by 2030 under current state-legal conditions (source: grandviewresearch.com, statista.com). Federal reclassification, particularly to Schedule III, could accelerate this growth, potentially adding an additional 15-25% to market size projections due to increased investment, broader access, and reduced operational costs (author's assumption).

Capital Investment: Under Schedule I, institutional investment in the cannabis sector has been limited. Reclassification could unlock tens of billions of dollars in new capital from mainstream financial institutions, private equity, and venture capital firms, fueling industry expansion and consolidation (source: author's assumption, based on industry reports and investment trends in other emerging sectors).

Banking Access: Currently, only a small percentage of banks and credit unions openly serve the cannabis industry (source: fincen.gov). Reclassification could increase this number significantly, potentially bringing 50-70% of cannabis businesses into the mainstream banking system within 3-5 years (author's assumption).

Risks & Mitigations

Several risks accompany the reclassification process, requiring proactive mitigation strategies:

Regulatory Uncertainty and Delays: The administrative process can be lengthy and subject to legal challenges or political shifts. The final classification might also come with unexpected new federal regulations that conflict with existing state laws, creating a new layer of complexity.

Mitigation: Industry stakeholders must actively engage in the public comment period, providing data and perspectives. Federal agencies should prioritize clear, consistent, and timely guidance. States should establish inter-agency task forces to prepare for harmonization efforts.

Banking and Financial Hesitancy: While reclassification would reduce risk, some financial institutions may remain hesitant due to lingering stigma, complex new compliance requirements, or the absence of explicit federal safe harbor legislation (e.g., SAFE Banking Act).

Mitigation: The Treasury Department and FinCEN must issue comprehensive and unambiguous guidance for financial institutions. Congress could still pass explicit safe harbor legislation to provide additional assurance to banks.

Public Health Concerns: Increased accessibility and reduced stigma could lead to higher rates of cannabis use, particularly among youth, and potentially increased instances of impaired driving or other public health issues.

Mitigation: Federal and state governments must invest heavily in public health education campaigns, particularly targeting youth. Robust age verification systems, product potency regulations, and impaired driving enforcement measures must be implemented and strengthened. Funding for cannabis research, including its long-term health effects, should be prioritized.

International Treaty Obligations: The reclassification of cannabis, even to Schedule III, could put the U.S. in conflict with its obligations under international drug control treaties, such as the UN Single Convention on Narcotic Drugs of 1961 (source: un.org). These treaties generally require signatory states to control cannabis more strictly than Schedule III would imply.

Mitigation: The U.S. State Department and relevant agencies would need to engage in diplomatic efforts to explain the reclassification, potentially seeking reinterpretation of treaty obligations or exploring options for reservations or withdrawal from specific provisions, though the latter is less likely.

Political Reversal: A future administration could potentially reverse the executive order or initiate a process to re-schedule cannabis back to Schedule I, creating significant instability for the industry.

Mitigation: The industry and its advocates should work towards legislative solutions that codify the reclassification or even descheduling, making it more difficult for future executive actions to reverse. Building broad bipartisan consensus on cannabis reform is crucial for long-term stability.

Sector/Region Impacts

Cannabis Industry: This sector will experience a paradigm shift. Companies will see improved profitability due to 280E repeal, greater access to capital, and potential for interstate commerce in the long term. This will likely lead to increased mergers and acquisitions, consolidation, and the entry of larger, institutional players. Smaller, less capitalized businesses may struggle to compete with new entrants (source: author's assumption).

Financial Services: Banks, credit unions, and investment firms will find it significantly easier and less risky to serve cannabis businesses. This will open up new revenue streams for financial institutions and provide much-needed capital and services to the cannabis industry. Payment processors, insurers, and real estate companies will also see expanded opportunities.

Pharmaceuticals & Biotech: The reclassification will de-risk research into cannabis and cannabinoids, potentially leading to a surge in clinical trials and the development of new FDA-approved cannabis-based medicines. This could create a new competitive landscape between traditional pharmaceutical companies and existing cannabis firms.

Agriculture & Logistics: As the industry grows and potentially moves towards interstate commerce, there will be increased demand for agricultural infrastructure, specialized cultivation technologies, and sophisticated logistics and supply chain management systems. This will impact regions with suitable climates and existing agricultural infrastructure.

Legal & Consulting Services: Demand for legal expertise in regulatory compliance, corporate structuring, intellectual property, and mergers & acquisitions will surge. Consulting firms specializing in market entry, operational efficiency, and public policy will also see increased demand.

State & Local Governments: States with existing legal markets will need to adapt their regulatory frameworks. States currently prohibiting cannabis may face increased pressure to legalize, driven by economic opportunities and federal clarity. Local governments will need to manage zoning, licensing, and public safety implications.

Recommendations & Outlook

For governments (federal and state), the immediate priority should be to establish clear, consistent, and harmonized regulatory frameworks (scenario-based assumption: successful reclassification will necessitate significant regulatory harmonization). Federal agencies, particularly the DEA, FDA, Treasury, and Justice Department, must collaborate to issue comprehensive guidance promptly to minimize uncertainty. States should proactively review their existing cannabis laws to identify areas requiring adjustment to align with a new federal classification. Investment in public health education and research into cannabis's long-term effects is crucial to mitigate potential societal costs (scenario-based assumption: robust public health measures are essential for sustainable reform).

For infrastructure delivery and public finance, the reclassification presents both opportunities and challenges. Governments should evaluate the potential for substantial new tax revenue streams from a federally recognized cannabis industry and allocate these resources strategically towards regulatory oversight, public health initiatives, and potentially infrastructure improvements related to agricultural and retail logistics for the sector (scenario-based assumption: reclassification will unlock substantial economic activity and tax revenue, requiring strategic public investment and fiscal planning). Public finance officials should begin modeling the fiscal impacts, considering both increased tax revenues and potential costs associated with regulation and public health programs.

For large-cap industry actors:

Cannabis Companies: Prepare for a more competitive and federally regulated environment. Focus on operational excellence, product quality, and robust compliance systems. Seek strategic partnerships and prepare for increased institutional investment and potential consolidation (scenario-based assumption: reclassification will attract significant institutional investment and lead to consolidation).

Financial Institutions: Develop comprehensive strategies for serving the cannabis industry, including robust compliance protocols, risk management frameworks, and training for staff. Engage with federal regulators to understand and shape new guidance (scenario-based assumption: banking access will expand significantly, but regulatory clarity will be paramount).

Pharmaceutical and Biotech Companies: Accelerate research and development into cannabis-derived therapeutics. Explore potential collaborations or acquisitions within the existing cannabis industry to leverage expertise and market presence (scenario-based assumption: reclassification will de-risk research, leading to new drug development).

Overall Outlook: The executive order to reclassify cannabis marks a watershed moment in U.S. drug policy. While the administrative process will be complex and potentially lengthy, the direction of travel strongly indicates a fundamental shift away from federal prohibition. This will unleash significant economic opportunities, reshape regulatory landscapes, and necessitate substantial adjustments across public finance, policy, and various industry sectors. The transition will require careful planning, inter-agency coordination, and proactive engagement from all stakeholders to navigate the complexities and maximize the benefits while mitigating associated risks (scenario-based assumption: the reclassification process, while potentially lengthy, is likely to proceed, fundamentally altering the landscape for cannabis in the U.S.).