Imagine running a completely legal business but getting taxed like you're running a heroin operation. That's been the reality for American cannabis companies, and it might finally be changing.

President Donald Trump's recent executive order urging the Department of Justice to reschedule cannabis to Schedule 3 is being called the "most consequential federal cannabis policy shift" in over 50 years. And according to Dan Ahrens, portfolio manager of the AdvisorShares Pure US Cannabis ETF (MSOS), the real story isn't just about legitimacy—it's about taxes.

The Narcotics Trafficker Tax Problem

Here's the absurd part: Under current law, cannabis sits in Schedule 1, right alongside heroin. That classification means state-licensed cannabis operators—businesses paying rent, hiring employees, and filing tax returns—are subject to Section 280E of the Internal Revenue Code. This provision was designed for actual drug traffickers, and it forbids them from deducting business expenses.

Ahrens told Yahoo Finance that this creates a devastating financial handicap. "They are saddled with this 280E tax, which taxes them as narcotics traffickers," he explained. "They cannot deduct any business expenses. Not a single business expense, not even payroll, certainly not rents and mortgages."

Think about that for a second. Every other business in America can deduct salaries, rent, marketing costs, and office supplies. Cannabis companies? Nothing. They pay taxes on revenue before subtracting what it actually costs to run the business.

Moving cannabis to Schedule 3—a category reserved for substances with accepted medical use—would "automatically remove" this punitive burden. Suddenly, U.S. cannabis operators could deduct normal operating costs like every other business. The impact on balance sheets and cash flow would be immediate and transformative.

The Market Is Reacting, Cautiously

The cannabis sector has had a wild ride. The AdvisorShares MSOS ETF reportedly outperformed the S&P 500 in 2025, a remarkable turnaround for an industry that's been stuck in regulatory limbo.

But Ahrens isn't exactly popping champagne. He warns that cannabis remains the "most volatile place to invest" and describes recent years as a "quagmire" of empty political promises. Institutional investors have mostly stayed away, waiting for reform to become "real" rather than just theoretical.

While Ahrens expects a market "pop" when rescheduling is finalized, he sees this as just the beginning of a "multi-leg process." There's legitimate momentum here, but also plenty of reasons for caution.

What Still Needs to Happen

Rescheduling solves the tax nightmare, but it doesn't fix everything. U.S. cannabis companies still can't list on major exchanges like NASDAQ or NYSE—a privilege their Canadian competitors enjoy. That limits access to capital and institutional investment.

Then there's banking. The industry is still waiting on "safe harbor" provisions that would let cannabis businesses operate with normal banking relationships instead of dealing primarily in cash.

"We don't know the timing," Ahrens cautioned. He advises investors to expect continued volatility as the government works out how to distinguish between medical and adult-use programs under the new federal framework.

For investors considering the space, here's how some major cannabis stocks and ETFs have performed:

The bottom line? Trump's executive order could finally end one of the most ridiculous tax penalties in American business. But between here and a fully reformed cannabis market, there are still plenty of regulatory hurdles to clear.