Cannabis stocks spiked immediately after President Joe Biden announced the reclassification of cannabis from a Schedule I to a Schedule III drug, endorsing the Justice Department’s recommendation. 

Biden posted a video on X at 1 p.m. May 16, declaring that the U.S. Department of Justice would indeed reclassify cannabis, and within hours, cannabis-related stocks began rising amid the growing excitement.

“Today’s step is another historic step moving forward,” Poseidon Investment Management co-founder Emily Paxhia told Yahoo! Finance on an episode of Market Domination. “I think anything around cannabis reform has been very difficult for the past 10 years plus, obviously, and so anything that’s working through an ordinary process and following the steps as it should is very confirmatory.” 

Familiar names of bigger players in the industry are popping up. “We’ve seen increasing volumes in the top names in the industry,” Paxhia added.

Multi-state operators (MSOs) would benefit the most from the Schedule III classification, like Canopy Growth, Curaleaf Holdings, Green Thumb Industries, and Trulieve Cannabis, with operations in about three dozen states that allow cannabis sales. Shares of Canopy Growth, an enormous Canadian cannabis producer that trades on the New York Stock Exchange, rose 15%, to $11.95, after the tweet, Barron’s reports.

The reclassification of cannabis doesn’t fix the gap between federal and state law, and it sparked some negative feedback of a potential pharmaceutical takeover.

“On behalf of thousands of legal businesses operating across the country, we commend President Biden for taking this important first step toward a more rational marijuana policy,” said Aaron Smith, who heads the National Cannabis Industry Association. “Now it’s time for Congress to enact legislation that would protect our industry.”

Forbes reports that shares of Canopy Growth Corp. ended up closing at roughly $11, an increase of over 11% on the day to a one-month high. Canadian cannabis producer Aurora Cannabis’ stock rose nearly 7%, closing Thursday at nearly $8 per share. Cannabis product manufacturer Green Thumb Industries’ stock rose nearly 3%, climbing to a high of just over $13.

Shares of Trulieve Cannabis Corp rose as well to nearly 6% to just under $13 per share, while Tilray Brands’ shares increased by roughly 2.5% to just over $2 per share. Shares of Cronos Group also jumped over 4% on Thursday, closing at over $3 per share.

It’s important to keep in perspective the overall picture. Despite the recent gains seen by cannabis MSOs, several cannabis-related stocks are far below their 5-year highs. Curaleaf is down nearly 66% from its February 2021 high, while Tilray is down nearly 97% from its high from the same month, Reuters reports.

A 60-day commitment period will take place for a space for public input.

The Justice Department will take comments on the proposal after it appears in the Federal Register. A final rule would have to be issued before the reclassification would take effect. The process can be lengthy,  and it must undergo a public comment period before it can be implemented, which can take up to a year.

Tax Implications of a Schedule III Classification

Part of the excitement surrounding the reclassification move could be centered on the probate changes in tax policy that is near. Legal advisors are expecting the limitations of tax code Section 280E will change significantly now that cannabis is moving to Schedule III of the Controlled Substances Act

Duane Morris LLP & Affiliates, for instance, provided an explainer that indicates Section 280E provides that:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Once cannabis is rescheduled as a Schedule III substance, Section 280E will not apply to that company’s tax return and additionally, the company would no longer be banned from deducting expenses on tax returns like any other type of legal business.

Kilpatrick Townsend & Stockton LLP provided a Truth vs. Fiction article that explains  reclassification, in reality, it will probably take over a year for major changes to roll out. But one of the biggest lies or rumors, they explained, is that Schedule III will wipe out existing state cannabis markets. No one knows that at this point, and state cannabis markets have always operated in the gray market.