IRS and Treasury Move to Clarify Cannabis Tax Rules

WASHINGTON – The U.S. Department of the Treasury and the Internal Revenue Service made an announcement, confirming they will issue formal guidance to address the federal tax consequences of a Department of Justice order that immediately reclassified certain Cannabis products under the Controlled Substances Act (CSA).

The scope of this reclassification is deliberate and narrow. The DOJ’s Final Order places Cannabis contained in FDA-approved products or subject to a state medical Cannabis license, as well as certain Cannabis extracts and naturally derived delta-9-tetrahydrocannabinols, in Schedule III. Unlicensed crops and bulk Cannabis not yet incorporated into an FDA-approved product, and the entire adult-use recreational market remain in Schedule I. Hemp remains separately regulated. This is a structural distinction that every MSO with both medical and adult-use licenses will need to navigate carefully.

The core financial consequence of this move centers on Section 280E of the Internal Revenue Code. With the new DOJ Final Order now in effect, Treasury and the IRS said they “expect DOJ’s action to have significant positive tax consequences for businesses in the medical marijuana industry,” and they confirmed formal guidance is forthcoming. As Treasury stated directly: “rescheduling generally removes Section 280E as a bar to claiming deductions and credits for businesses that as a result of the Final Order no longer traffic in Schedule I or II controlled substances under the CSA.”

As of April 22, 2026, licensed medical Cannabis is no longer subject to Section 280E of the Internal Revenue Code.
That is a hard legal date, and the industry should treat it as such.

Guidance is expected to include a transition rule providing that, for purposes of Section 280E, rescheduling generally will be considered to first apply for a business’s full taxable year that includes the effective date of the Final Order, for the business’s activities that do not involve Schedule I or II controlled substances.

That is a meaningful concession to the industry. It avoids a mid-year split that could have cost operators a significant portion of 2026 deductions. However, operators on a calendar tax year still face complications depending on the precise mechanics of the forthcoming guidance.

The more charged issue is retroactivity. The DOJ order itself goes further than the IRS announcement, with Acting Attorney General Blanche encouraging the Secretary of the Treasury to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical Cannabis license. This would be industry-altering relief – the difference between billions in potential refunds and a going-forward benefit only. However, the document does not mandate such relief, leaving any retroactive changes to future action by Treasury.

Thursday’s announcement should not be read as the conclusion of the federal rescheduling story. DEA withdrew the prior administration’s notice of hearing and is restarting the administrative process, which now begins June 29, 2026. A new notice of hearing is being published in the Federal Register. A final rule covering the broader Cannabis market, including adult-use, could follow if the administrative process proceeds without major legal disruption, though litigation remains a realistic variable throughout the remainder of 2026.

Meanwhile, Congress may act on related fronts, including the SAFER Banking Act and adjustments to the statutory definition of hemp following November 2025 legislation that changes hemp-derived THC thresholds effective November 2026.

For MSOs managing both medical and adult-use licenses, the immediate task is revenue segmentation. The DOJ’s April 2026 order requires tax practitioners to carefully segregate medical and recreational Cannabis activities. State-licensed medical Cannabis operations are liberated from the punitive constraints of Section 280E, and patients acquiring medical Cannabis via prescription may now find a path to a Schedule A medical deduction. However, businesses and individuals transacting in the recreational Cannabis market will find their federal tax treatment entirely unchanged.

The DOJ order itself flags the limits of its own authority:

“Nothing in this rule constitutes a determination regarding federal tax liability, and state licensees should consult with tax counsel regarding the applicability of Section 280E to their specific circumstances.”