The United States Department of Justice has formally issued an order to reclassify state-licensed medical marijuana from Schedule I to Schedule III under the Controlled Substances Act, marking a historic pivot in federal drug policy. This shift, initiated by an executive order from President Donald Trump in December 2025, acknowledges the medical utility of cannabis for the first time in over 50 years. While the move does not legalize marijuana at the federal level, it significantly reduces the tax burden on state-sanctioned cannabis businesses and eliminates long-standing barriers to clinical research. Market reaction was immediate, with major cannabis-related stocks surging between 15% and 23% following the announcement.
WASHINGTON — In a move that fundamentally alters the legal landscape of the American cannabis industry, Acting Attorney General Todd Blanche signed a final order on Thursday to reclassify state-licensed medical marijuana as a Schedule III controlled substance. The decision moves the drug out of the most restrictive category—Schedule I—where it has sat alongside heroin and LSD since 1970, and places it in the same regulatory tier as ketamine, anabolic steroids, and Tylenol with codeine.
The reclassification specifically applies to marijuana and marijuana-derived products, such as delta-9 THC, that are produced and distributed within the 40 states currently maintaining medical marijuana frameworks. According to the Department of Justice (DOJ), any marijuana handled outside of these state-licensed programs or without FDA approval will remain classified as Schedule I, meaning illicit trafficking and unregulated sales will continue to face the highest level of federal criminal penalties.
The Road to Reclassification
The administrative shift follows months of accelerated rulemaking within the Drug Enforcement Administration (DEA) and the Department of Health and Human Services (HHS). In December 2025, President Donald Trump signed an executive order directing the DOJ to expedite the review of marijuana’s status, citing the “reality of state-level medical programs” and the need for “common-sense federal oversight.”
During a statement released Thursday, Blanche noted that the administration was delivering on a promise to expand access to medical treatment options. “This rescheduling action allows for research on the safety and efficacy of this substance, ultimately providing patients with better care and doctors with more reliable information,” Blanche stated. The mood among advocates in Washington was one of cautious triumph, though some criticized the move for not going far enough toward full decriminalization.
The shift is grounded in a 2024 recommendation from the HHS, which concluded that marijuana has a “currently accepted medical use in treatment” and a “potential for abuse less than the drugs in Schedules I and II.” This finding was a prerequisite for the DEA to move the drug to Schedule III.
Financial and Industrial Implications
For the multibillion-dollar U.S. cannabis industry, the most immediate impact of the Schedule III designation is the removal of the Internal Revenue Code (IRC) Section 280E. Under this decades-old tax provision, businesses “trafficking” in Schedule I or II substances were prohibited from deducting ordinary business expenses—such as rent, payroll, and marketing—from their federal taxes.
This often resulted in effective tax rates as high as 70% to 90% for state-legal dispensaries. With the transition to Schedule III, these companies will now be eligible for standard corporate tax deductions, representing a massive financial windfall for major operators. Market investors responded with enthusiasm; shares of Canopy Growth surged 23%, while Tilray Brands rose 15% in premarket trading. Other firms, including Trulieve Cannabis and Curaleaf Holdings, also saw significant gains as the news broke.
However, the reclassification does not solve all the industry’s hurdles. Cannabis remains a “controlled substance,” meaning it is still not fully legal under federal law. Major national banks and credit card processors may still hesitate to work with cannabis firms until specific banking safe harbor legislation, such as the SAFER Banking Act, is passed by Congress. Furthermore, the move does not automatically permit interstate commerce, as the federal government still maintains a prohibition on transporting cannabis across state lines.
Historical Context: Ending the 1970 Status Quo
The federal government’s stance on marijuana has been largely frozen since the passage of the Controlled Substances Act (CSA) in 1970. Under that law, Schedule I was reserved for substances with “no currently accepted medical use and a high potential for abuse.” This designation was maintained for over half a century, even as the majority of U.S. states moved to legalize the plant for medical or adult-use purposes.
The legal roots of prohibition go back even further to the Marihuana Tax Act of 1937, which effectively criminalized the plant through prohibitive taxation. Critics of the current shift, including Smart Approaches to Marijuana (SAM) CEO Kevin Sabet, have labeled the reclassification a “tax break to Big Weed,” arguing that the federal government is abandoning its role in protecting public health from increasingly potent cannabis products.
Conversely, the American Medical Association and various veterans’ groups have long advocated for the move, arguing that the Schedule I status created a “catch-22” for scientists: they could not prove medical utility because the drug was too restricted to study, but it remained restricted because there was no proof of medical utility.
Next Steps and Broader Rescheduling
While Thursday’s order covers state-licensed medical products, the administration is not stopping there. The DOJ has announced an expedited administrative hearing process, scheduled to begin in late June 2026, to consider the broader rescheduling of all marijuana. This could potentially move the entire plant to Schedule III, regardless of its end-use, though this path is expected to face significant legal challenges from prohibitionist groups.
For now, the roughly one in five U.S. residents who use marijuana annually—according to data from the Centers for Disease Control and Prevention—will see little change at the consumer level. Adult-use recreational programs in 24 states will continue to operate under state law, though their operators will also likely benefit from the tax relief provided by the DEA’s shift.
The administration’s move is seen by political analysts as a strategic effort to bridge the gap between federal law and the public consensus. With 40 states now recognizing medical marijuana, the federal government’s shift to Schedule III represents a pragmatic acknowledgment of a changing national landscape.
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