It seems like the US weed industry finally got what it wanted. Why did pot stocks plunge?

The Department of Justice issued a rule on Thursday reclassifying marijuana as a less dangerous drug, paving the way for US cannabis companies to finally be taxed like normal business and — for some of them — get a whiff of profit for the first time. 

Pot stocks tanked. 

The AdvisorShares Pure US Cannabis ETF, the benchmark ETF for US cannabis companies, dropped 17%. Canadian cannabis companies Canopy Growth, Tilray, and SNDL Inc. fell as well. The stocks lost much of the gains they had made since Wednesday, when Axios reported that the move was imminent. 

“This looks like a ‘sell the news’ reaction,” said Frederico Gomes, director of institutional research in life sciences at ATB Capital Markets.

The same thing happened in December when President Trump signed an executive order directing regulators to reclassify marijuana as a less dangerous drug. Pot stocks rose as the rumors began to circle around and then dropped when the news actually happened. 

But for publicly traded weed companies, the rule itself also left much to be desired.

The rule immediately reclassifies cannabis only from FDA-approved and state-licensed medical cannabis companies. Companies that sell cannabis for recreational use (most publicly traded pot companies) have to wait for an expedited hearing process, which is set to start in late June and conclude by mid-July.

“While that was somewhat unexpected, we view it as a net positive,” Gomes said. “It allows a meaningful part of the market to move forward immediately, avoids delays that could have pushed the full process into 2027, and reduces longer-term litigation risk.”

Marc Hauser, a cannabis industry adviser and attorney, said in his newsletter, Cannabis Musings, that he credits the federal government “for threading the needle, but the outcome ends up being a structural cacophony that will surely benefit lawyers and accountants.”

One of the biggest challenges for US cannabis companies is an unfriendly tax code. Under the current regulatory scheme, cannabis companies can generally expense only the cost of acquiring their product, but virtually no other business expenses. The result is that cannabis companies are paying an effective tax rate of upward of 50%, with some companies reporting paying more taxes than they earn in profit.

Medical cannabis providers immediately covered by the rule will get to claim normal business expenses, and the DOJ recommends the Treasury Department give them retroactive relief from taxes paid under the previous rules. But many medical cannabis providers also sell adult-use cannabis, making it unclear whether those dual-license manufacturers will benefit from the change without spinning off their medical units.

Also, to comply with the 1961 Single Convention on Narcotic Drugs, an international treaty that requires “a government agency serve as the exclusive purchaser of cannabis production,” the DOJ established a bizarre work-around where the Drug Enforcement Agency buys and resells pot to manufacturers. The DEA becoming a drug dealer for US cannabis firms opens a whole other can of worms, Hauser said.

“The lawyers and accountants are basically being granted a federally-sponsored pension plan by all of this,” he said.

The rule also does not immediately change the industry’s challenges when it comes to banking or lending. Adam Stettner, CEO of FundCanna, a cannabis industry lender, said the rule is a step in the right direction and signals to institutional capital “that parts of the cannabis market are becoming more standardized and financeable.”

“At the same time, the industry’s core challenges persist,” he said. “Operators will continue to face constrained access to capital, fragmented regulatory regimes, and ongoing cash flow pressure across the supply chain.”