The U.S. Drug Enforcement Administration is recommending cannabis be reclassified as less risky, people familiar with the matter said — a move that could help the legal marijuana industry benefit from tax breaks. Pot stocks surged on the news. 

Several steps remain in the process of rescheduling marijuana to Schedule III from Schedule I, said the people, who asked not to be named because the information hasn’t yet been made public. This would ease access to cannabis without decriminalizing it.

Shares of cannabis-related companies surged in Tuesday trading, with Tilray Brands Inc. jumping as much as 33 per cent, while Canopy Growth Corp. soared nearly 40 per cent. Meanwhile, the MJ PurePlay 100 Index, which tracks 95 global stocks exposed to the cannabis industry, climbed about 18 per cent, its biggest one-day gain since October 2022. 

 “Rescheduling is likely to bring a vibrant return of investor interest that could quickly move the sector back to robust optimism,” said Morgan Paxhia, co-founder of Poseidon Investment Management, which invests in cannabis.

A majority of Americans believe marijuana should be decriminalized for recreational or medical use, a policy that Biden said he would pursue while in office but that still lacks widespread support in Congress. Biden’s favourability has waned among key voting blocs that favour legalization that he needs to win reelection, including young voters and Black Americans. 

Rescheduling, if ultimately enacted, would represent a boon to the legal cannabis industry that is estimated to have generated around US$35 billion in sales last year, according to New Frontier Data, a market research firm. It responds to growing cries to reclassify the drug in order to make medical use easier, and bring in more tax dollars through regulated sales. The decision would push back against concerns that reclassifying the drug could make it harder to prosecute drug cartels, and that new high-potency forms of cannabis are addictive. 

If marijuana is reclassified as Schedule III it will be treated like substances such as ketamine and anabolic steroids, which require prescriptions but aren’t federally prohibited. Marijuana is currently classified as Schedule I, which means it’s seen as equally risky to drugs such as heroin.

A spokeswoman for the DEA declined to comment, and referred calls to the DOJ.

“Moving to Schedule III represents a tectonic shift in our nation’s drug laws,” said the U.S. Cannabis Council, a trade group for the industry, adding that the change would end the tax penalty called 280E that bars companies that deal in federally illegal substances from taking tax deductions. The new legal status should help cannabis businesses of all sizes, the group said, and make the regulated market better able to compete with the illegal market.

In October 2022, President Joe Biden asked the Department of Health and Human Services secretary and the U.S. Attorney General to review how marijuana was scheduled based on its medical use, potential for abuse, safety and potential for dependence. Months later in August 2023, HHS sent a letter to the Drug Enforcement Administration head Anne Milgram recommending easing restrictions on marijuana by reclassifying it as a Schedule III drug under the Controlled Substances Act. The recommendation, which was first reported by Bloomberg News, set in motion the DEA’s own monthslong review process.