What to know about Trump’s potential change in federal marijuana policy

President Trump is actively considering reclassifying marijuana from a Schedule I to a Schedule III substance, a policy shift expected to be decided in weeks. This reclassification, previously proposed by the Biden administration, would notably allow state-legal cannabis businesses to claim federal income tax deductions, significantly improving their financial viability, and would also facilitate research. While not full federal legalization, this move represents a crucial regulatory evolution for the burgeoning cannabis sector, occurring amid widespread state-level legalization and growing public support.

Analysis

The prospect of reclassifying marijuana from a Schedule I to a Schedule III substance under the Trump administration presents a significant, near-term catalyst for the U.S. cannabis industry. While this administrative action would not constitute federal legalization for recreational use, its primary financial impact would be the elimination of tax code Section 280E for state-legal businesses, allowing them to deduct standard business expenses and substantially improving profitability and cash flow. This regulatory shift, which a decision is expected on within weeks, would also facilitate greater research into marijuana's medical applications. However, investors should note that according to a Congressional Research Service report, rescheduling is unlikely to resolve the industry's critical lack of access to traditional banking services and capital markets. The potential policy change is occurring against a backdrop of strong public support, with a Gallup poll showing 68% in favor of legalization, and rising consumption, with 22.3% of the population reporting use in the past year. Despite these tailwinds, the outcome remains uncertain due to political considerations and opposition from law enforcement groups, reflecting the President's own stated ambivalence on the topic.

Key Decisions for Investors

• Investors should closely monitor the administration's decision on rescheduling, as a move to Schedule III would be a major positive catalyst, primarily by removing the punitive 280E tax burden on U.S. cannabis operators.
• Consider focusing on U.S. multi-state operators (MSOs) that are at or near profitability, as they would be the most immediate beneficiaries of the improved cash flow and net income resulting from the ability to deduct business expenses.
• It is crucial to temper long-term expectations, as reclassification alone is unlikely to solve the industry's systemic challenges related to banking access and capital raising, which will likely require further legislative action.