Progress on Cannabis Rescheduling and Banking Access Still in Flux as Presidential Election Approaches

US cannabis shares have given up a significant portion of the gains which flowed to them after news broke that the DEA may reclassify the substance, downgrading it from a Schedule I narcotic to Schedule III. Nearly a year on from this development, no reliable timetable can be established for when the change might be finalized. A delayed process – or an expedited one – could materially shift the balance in the US’s upcoming Presidential election and set the stage for further adjustments to cannabis regulation in the future.

As for the cannabis businesses themselves, rescheduling is expected to slash tax bills and improve their profitability. This relief is desperately needed as less than a third of American cannabis firms are currently generating a profit. The removal of federal restrictions on their access to banking services would be an even more favorable regulatory change than DEA rescheduling, but legislative efforts to make this a reality in Congress appear to have stalled.

Related ETFs: AdvisorShares Pure US Cannabis ETF (MSOS), ETFMG Alternative Harvest ETF (MJ)

It has been 11 months since MRP first covered the prospect of cannabis rescheduling in the US. That report followed the Department of Health and Human Services’ (HHS) recommendation that the drug should be reclassified as a lower priority Schedule III narcotic under the Controlled Substances Act. The increasing possibility of long-awaited adjustments to an overbearing federal regulatory framework, which is often totally incompatible with state laws, was a welcome development for investors. The AdvisorShares Pure US Cannabis ETF (MSOS) shot to more than $9.10 per share by early September 2023, further rising to a 16-month high of $11.26 in April 2024. As of yesterday, however, MSOS had given back most of the gains it received from the rescheduling bump, closing at just $7.52.

The long process of rescheduling, which was initiated by the Department of Justice in conjunction with the DEA on May 13, will not materially alter the US existing federal prohibition on the transfer and possession of cannabis, but it would eliminate concerns about state-legal cannabis sales being treated as the trafficking of a controlled substance under the federal tax code, covered by Section 280E. This legal classification meant that these firms engaging in cannabis-related business transactions were often on the hook for an effective tax rate of 70% or more. Without the change in cannabis’s scheduling at the DEA, Whitney Economics has forecast that licensed US cannabis enterprises could pay $2.3 billion more in federal taxes in 2024 than they would under normal business tax rules.

Lowering cannabis firms’ tax bills will take some pressure off of the industry, which has been…