U.S. Moves Medical Cannabis to Schedule III, Stocks Swing on Limited Scope
The U.S. Department of Justice on April 23 immediately reclassified state-licensed medical cannabis from Schedule I to Schedule III of the Controlled Substances Act, marking the most significant shift in federal drug policy in decades, though shares of major cannabis companies reversed early gains as investors assessed the narrow scope of the action.
Acting Attorney General Todd Blanche announced the move in a post on X, saying the DOJ was “immediately rescheduling FDA-approved marijuana and state-licensed marijuana from Schedule I to Schedule III.” The DEA simultaneously announced an expedited administrative hearing, set to begin June 29, 2026 to consider the broader rescheduling of all cannabis, including recreational use.
Stocks Rally, Then Retreat
Cannabis shares surged on the initial announcement before slumping 6% to 10% in afternoon trading. Cronos Group, Aurora Cannabis, Canopy Growth, and Tilray Brands all fell sharply as investors digested the limited scope of the order.
FundCanna CEO Adam Stettner said the move stops short of a sweeping reclassification. The order applies specifically to FDA-approved cannabis drugs and products operating under state medical marijuana frameworks, he said, leaving companies focused on recreational use markets subject to existing restrictions, including limited access to capital and regulatory fragmentation.
Todd Harrison, founding partner and chief investment officer at CB1 Capital Management, said the move “was narrower than investors had hoped” and that most of the market did not understand “the nuances involved, the opposition or the legal challenges.”
Dan Ahrens, portfolio manager of the AdvisorShares Pure U.S. Cannabis ETF, described the selloff as partly a “sell the news” reaction, but said it was driven mainly by investors misreading the announcement of hearings as “more of the same delays we’ve had for years,” rather than as a necessary step toward completing full rescheduling.
Tax Relief for Medical Operators
The most immediate financial impact of the order falls on state-licensed medical cannabis businesses, which will no longer be subject to Section 280E of the federal tax code, a provision that had prohibited cannabis companies from deducting ordinary business expenses, pushing effective tax rates for some operators above 75%.
The DOJ order also directs the Treasury Department to consider retroactive relief for prior tax years, potentially allowing qualifying businesses to file amended returns and recover overpaid taxes.
Broader Rescheduling Process Reset
The DOJ formally withdrew prior administrative proceedings, which had been frozen since late 2024 following the retirement of the presiding administrative law judge and concerns over improper communications, and replaced them with a new hearing process beginning June 29, 2026.
DEA Administrator Terry Cole said the agency was “expeditiously moving forward with the administrative hearing process, bringing consistency and oversight to an area that has lacked both.”
If the broader hearing concludes on schedule, a final rule extending Schedule III status to all cannabis, including recreational use, could be published as early as late 2026.
Industry Response Mixed
Tilray CEO Irwin Simon said rescheduling “has the potential to accelerate clinical research, broaden access, and elevate the quality, consistency, and safety standards that establish medical cannabis as a legitimate pillar of modern healthcare.”
Betty Aldworth, chair of the Marijuana Policy Project, called the development “a step in the right direction, but not a solution,” noting it does not resolve conflicts between federal and state law or broader legal and financial barriers facing the industry.
Medicinal cannabis is currently legal in some form in 47 U.S. states, three territories, and the District of Columbia.
Legal Challenges Expected
Opposition to rescheduling has been organised and vocal. Twenty-two Republican senators and 26 House Republicans formally urged the administration to abandon rescheduling prior to a December 2025 executive order. Smart Approaches to Marijuana has reportedly retained former Attorney General Bill Barr to litigate against any final rescheduling action.
The DOJ order includes a severability provision, indicating the department anticipates partial legal challenges.
What the Order Does Not Do?
The order does not legalise recreational cannabis, change federal criminal penalties for cannabis possession, or immediately resolve banking and anti-money laundering restrictions facing cannabis businesses under the Bank Secrecy Act. Recreational use of cannabis remains a Schedule I controlled substance pending the outcome of the June hearing.
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