This past April, the U.S. Department of Justice reclassified medical cannabis from Schedule I to Schedule III – a move that, within the context of the Controlled Substances Act, acknowledges cannabis as having an accepted medical use. While this signaled a significant step forward for the cannabis industry, it also sparked confusion. What exactly was included in this order, and why did the Drug Enforcement Administration (DEA) hold administrative hearings in July 2026 to determine whether all other cannabis should be reclassified?

To answer these questions, here’s a breakdown of what we know so far about cannabis rescheduling. Please note that DCR has not spoken with the DEA or other federal officials and updates are derived from publicly available sources. 

Schedule I versus Schedule III

To better understand cannabis rescheduling, it’s helpful to know how the DEA classifies drugs and controlled substances. Under the Controlled Substances Act, drugs are placed into five distinct categories based on 1) the drug’s acceptable medical use; and 2) the drug’s abuse or dependency potential. Schedule I – recreational cannabis’s current class – is deemed as having the highest potential for abuse and no currently accepted medical use. 

• Schedule I: High potential for abuse; No currently accepted medical use; Lacks accepted safety for use under medical supervision; Examples: heroin, LSD, cannabis, ecstasy 
• Schedule II: High potential for abuse; Accepted medical use in treatment or with severe restrictions; Abuse may lead to severe psychological or physical dependence; Examples: Vicodin, cocaine, methamphetamine, Adderall 
• Schedule III: Potential for abuse less than substances in Schedule I or II; Accepted medical use in treatment; Abuse may lead to moderate or low physical dependence or high psychological dependence; Examples: Tylenol with codeine, ketamine, anabolic steroids, medical cannabis
• Schedule IV: Low potential for abuse relative to substances in Schedule III; Accepted medical use in treatment; Abuse may lead to limited physical dependence or psychological dependence relative to substances in Schedule III; Examples: Xanax, Ambien, Ativan
• Schedule V: Low potential for abuse relative to substances in Schedule IV; Accepted medical use in treatment; Abuse may lead to limited physical dependence or psychological dependence relative to substances in Schedule IV; Examples: Robitussin AC, Motofen

The White House Executive Order & the Department of Justice’s Attorney General Order 

1. The White House issued an executive order directing the U.S. Attorney General (AG) to expedite the formal rulemaking process for cannabis rescheduling. 
2. As a result, the AG Todd Blanche, issued a rescheduling order that only applied to 1) FDA-approved products containing cannabis; and 2) cannabis products regulated by a state medical cannabis license. *
3. Separately, the recently concluded DEA administrative hearings focused on the broader reclassification of cannabis. Specifically, the preliminary order issued by the DEA’s Chief Administrative Law Judge ahead of the rescheduling hearings stated the following: 

“The scope of this hearing is not to discuss the rescheduling of medical products approved by the Food and Drug Administration that contain marijuana and of medical marijuana products already regulated by the states, which has also occurred. The narrow issue in this matter is whether the remainder of marijuana, as defined in the CSA, should be transferred from its current place on schedule I of the list of controlled substances to schedule III.” 

*There have been lawsuits challenging the constitutionality of AG Blanche’s order. If a judge agrees with their claims then the Order will be blocked. We will update this information if and when that happens.

How can only some cannabis be considered acceptable for medical use? 

Seemingly obvious, there’s no special ingredient that makes a cannabis product “medicinal,” but there is a distinction that federal regulators are making. That difference is based on the intended use of the cannabis products. Medical cannabis can only be accessed with a doctor’s recommendation, and while the exact regulations vary by state, purchasing limits and taxation are typically different than that of adult-use cannabis. It’s easy to forget this distinction exists when you live in a cannabis-friendly state like California, but it is the basis on which the DEA is using to differentiate between cannabis that’s been reclassified to Schedule III, and cannabis that is currently still in Schedule I. 

Is medical cannabis federally legal?

No. A Schedule III drug is still a federally controlled substance that, under the Controlled Substances Act, is illegal to possess, manufacture, and distribute. Technically speaking, all state-licensed cannabis businesses are in violation of federal law, though the federal government has generally taken a hands-off approach and leaves it up to the states to police cannabis-related activity. The Department of Justice is also limited in how it can use federal funds to prosecute state-legal medical cannabis businesses, offering these licensees an extra shield from federal charges. 

Why does rescheduling matter? 

Drug classifications affect how controlled substances are treated under federal law. To put it simply, less severe drug classes often equal less severe penalties and restrictions. This impacts researchers, consumers, and businesses alike. With a Schedule III substance, the formally recognized medicinal benefits significantly reduce the barriers researchers face when conducting studies on the drug; and for consumers, it may mean greater protections and reduced criminal charges for possession. For businesses, it should offer much sought after tax benefits and financial support. 

Tax Implications

Under Section 280E of the Internal Revenue Code, any business involved in the trafficking of Schedule I or II substances is prohibited from claiming tax deductions or credits. In other words, cannabis businesses cannot benefit from the tax write offs most other businesses can, such as their day-to-day expenses and overhead costs like rent, utilities, wages, costs of administration, advertising, and more. With medical cannabis moving to Schedule III, it is believed that state-licensed medical cannabis businesses are now able to deduct the costs of selling their medical products. They may also find it easier to access capital and banking support. 

Financial institutions working with businesses involved in the trafficking of Schedule I substances are open to prosecution under the Bank Secrecy Act and criminal anti-money laundering laws. This not only means that banks are restricted in loaning to adult-use cannabis businesses, but that even engaging in financial transactions–like deposits and withdrawals–can make them vulnerable to civil and criminal asset forfeiture and criminal charges. A Schedule III classification would significantly reduce the legal risk and may make financial institutions more willing to work with recreational cannabis businesses.

Will all cannabis become fully legal? 

There’s a long road ahead in overcoming regulatory and legislative hurdles before cannabis is available recreationally and also in compliance with federal law. First and foremost, cannabis needs to be descheduled, as in removed from the federal government’s list of controlled substances altogether. This would take an act of Congress, which Senators are currently attempting to do with the Cannabis Administration and Opportunity Act (CAOA). This is not a simple route. Attitudes on cannabis vary greatly amongst lawmakers and reaching a consensus will be a challenge.

If and when this happens, then government agencies must tackle regulations. The Food and Drug Administration (FDA) would need to establish standard commercial, labeling, and safety rules for cannabis products, much like regulations for pharmaceuticals, alcohol, or tobacco. Rules would also need to be established for interstate commerce, banking, consumer protections, and combining or reconciling the differences between state and federal regulatory frameworks. 

So what’s next? 

The DEA concluded its rescheduling hearings on July 15. No decision has been made and there is no legal deadline for the DEA to issue a final ruling. However, businesses may find it useful to start preparations and planning for a post-rescheduling world now so they are ready for next steps if and when it should happen. For our social equity operators here in Los Angeles, be sure to take advantage of DCR’s one-on-one business consulting services. 

As developments occur, DCR will provide additional information. Sign up for DCR emails and visit DCR’s blog page.