Drug reform laws in the United States have shifted meaningfully in the last few years, but the change is uneven. In April 2026, the Department of Justice moved FDA-approved marijuana products and state-licensed medical marijuana into Schedule III, opening the door to normal business tax treatment for that slice of the industry. Federal sentencing rules have loosened through the First Step Act. Twenty-four states and the District of Columbia now run regulated adult-use cannabis markets, and millions of old drug convictions are being cleared through state expungement programs. None of this repeals federal prohibition, and the gap between state permission and federal law still traps people who assume legalization is total.
The April 2026 Marijuana Reclassification
The Department of Justice and the DEA issued a final order in April 2026 that immediately placed two categories of marijuana into Schedule III: FDA-approved drug products containing marijuana, and marijuana products regulated under a state medical marijuana license. Everything else, including recreational marijuana not covered by a state medical license and unlicensed bulk marijuana, stays in Schedule I. A broader administrative hearing on rescheduling marijuana more generally is set to begin June 29, 2026.1U.S. Department of Justice. Justice Department Places FDA-Approved Marijuana Products and Products Containing Marijuana Subject to a State Medical License in Schedule III
This is a split reclassification, not full legalization. The federal government now officially recognizes state-licensed medical cannabis as a substance with accepted medical use and lower abuse potential. Recreational operations without a medical license are still handling a Schedule I drug in the eyes of federal law.
What Changes for Taxes
Section 280E of the Internal Revenue Code bars any business trafficking in a Schedule I or II controlled substance from deducting ordinary expenses like rent, payroll, and utilities.2Office of the Law Revision Counsel. 26 USC 280E – Expenditures in Connection With the Illegal Sale of Drugs For years, that pushed effective tax rates for legal cannabis companies far above those of comparable businesses in other industries, because only cost of goods sold was deductible.
Because state-licensed medical marijuana is now Schedule III, those businesses are no longer trafficking in a Schedule I or II substance and can claim standard business deductions. Treasury and the IRS have announced that they will issue guidance on the transition, including a rule that the rescheduling generally applies for the business’s full taxable year that includes the effective date of the final order. Recreational-only operations without a medical license are still covered by Section 280E.3U.S. Department of the Treasury. Treasury, IRS Announce Process for Tax Guidance Following DOJ Final Order on Medical Marijuana Rescheduling
Legalization Versus Decriminalization
These two words get used interchangeably and shouldn’t be. Decriminalization keeps a substance illegal but removes jail time for small personal-use amounts, swapping arrest for a civil citation, a fine, and sometimes a health screening referral. The conduct is still prohibited; the enforcement is softened. Weight thresholds separating personal use from distribution amounts vary widely by jurisdiction.
Legalization goes further. Twenty-four states and D.C. have established regulated markets for adult-use cannabis, with state agencies overseeing cultivation, manufacturing, testing, and retail sale. Adults 21 and older can buy and possess limited quantities, commonly between one ounce and two and a half ounces of usable cannabis, depending on the state. Products must pass laboratory testing for potency, residual solvents, pesticides, heavy metals, and microbial contaminants before reaching shelves. Retail sales are taxed at rates that can run anywhere from single digits to well above 30 percent, with revenue often directed to education, treatment, and community reinvestment.
Broad decriminalization of harder drugs has been more politically fragile. One state decriminalized possession of all drugs by ballot measure in 2020, replacing criminal penalties with a $100 citation and optional treatment referrals. In 2024 the legislature reversed course, recriminalizing possession of substances like fentanyl, heroin, and methamphetamine with penalties up to 180 days in jail while keeping treatment-in-lieu-of-incarceration options. Cannabis decriminalization has generally held; broader decriminalization has not.
Where State Legality Still Runs Into Federal Law
State legalization does not repeal federal law. That gap causes real problems in three areas that catch people off guard.
Banking
Federal anti-money laundering statutes criminalize handling proceeds from activities that violate federal drug law, so banks that serve cannabis accounts face prosecution risk. A bank employee who knowingly processes deposits of $10,000 or more derived from marijuana sales could theoretically face a ten-year prison sentence, and financial institutions must file suspicious activity reports on transactions involving marijuana businesses.4Congressional Research Service. Marijuana Banking: Legal Issues and the SAFE(R) Banking Acts Many banks decline cannabis clients outright, pushing much of the industry into cash operations. Congress has repeatedly introduced the SAFE Banking Act, which would prohibit federal regulators from penalizing banks that serve state-legal cannabis businesses, but it has not been enacted.5Congress.gov. H.R. 2891 – SAFE Banking Act of 2023 The April 2026 reclassification may ease pressure on the medical side, but the picture is not yet settled.
Firearms
Federal law makes it illegal for anyone who is an “unlawful user of or addicted to any controlled substance” to possess a firearm or ammunition.6Office of the Law Revision Counsel. 18 USC 922 – Unlawful Acts Marijuana remains a controlled substance under federal law regardless of state legalization, which means a cannabis user is a prohibited person for firearms purposes. The ATF’s Form 4473 explicitly warns that marijuana use is unlawful under federal law even in states that have legalized it, and lying on the form is a separate federal crime. Many people expose themselves to serious charges without realizing it.
Employment and Drug Testing
Federal contractors and grantees must maintain a drug-free workplace, which includes publishing a policy prohibiting controlled substance use and running a drug awareness program.7Office of the Law Revision Counsel. 41 USC 8102 – Drug-Free Workplace Requirements for Federal Contractors Those requirements override state legalization for covered employees. Department of Transportation-regulated employers must continue all existing marijuana testing protocols without modification as of early 2026, and DOT maintains a zero-tolerance policy for safety-sensitive employees. The April 2026 reclassification has not changed that.
State law goes the other direction in a growing number of legalization states, which have enacted protections against firing or refusing to hire someone solely based on a positive test for marijuana metabolites during off-duty use. Those protections generally do not extend to safety-sensitive positions or jobs subject to federal regulation.
Federal Sentencing Relief Under the First Step Act
Mandatory minimums have historically forced federal judges to impose fixed prison terms in drug cases regardless of the defendant’s circumstances. The First Step Act of 2018 loosened two of the harshest mechanisms.
The Expanded Safety Valve
Federal law includes a safety valve letting judges sentence below the mandatory minimum in qualifying cases. Before the First Step Act, only defendants with essentially no criminal history qualified. The Act expanded eligibility to defendants with up to four criminal history points, excluding one-point offenses, as long as they have no prior three-point offense and no prior two-point violent offense. The defendant also must not have used violence, possessed a firearm, or played a leadership role in the offense, and must have truthfully shared all relevant information with the government.8Office of the Law Revision Counsel. 18 USC 3553 – Imposition of a Sentence A much larger group of low-level, non-violent defendants now qualifies for individualized sentencing rather than a rigid statutory floor.
Ending Firearms Charge Stacking
Under the pre-2018 rule, a defendant charged with multiple counts of using or carrying a firearm in connection with a drug offense faced escalating mandatory sentences on each count, even when all the counts came from the same case. A second count added a mandatory 25-year consecutive sentence on top of the first. The First Step Act narrowed that enhancement to defendants who have a prior conviction under the same statute already final, meaning a separate, previously resolved case, not just a separate count in the same indictment.9Office of the Law Revision Counsel. 18 USC 924 – Penalties That change alone stopped prosecutors from turning first-time cases into de facto life sentences through stacking.
Clearing an Old Drug Conviction
A drug conviction can follow someone for decades, blocking jobs, housing, and licensing long after a sentence ends. Two tools address that. Expungement destroys or erases the record. Sealing hides it from public view while keeping it available to law enforcement. Either can remove the duty to disclose a past conviction on most applications.
State Cannabis Expungement
Most legalization states have enacted some form of record relief for cannabis convictions, in two broad shapes. Petition-based systems require the person to file a motion in court, pay filing fees, and show they meet eligibility rules such as completing their sentence and staying conviction-free for a set period. Automatic systems shift the burden to the state, which identifies eligible records and clears them without any action from the individual.
Automatic programs exist because petition systems reach only a small fraction of eligible people. One major state moved to automatic expungement after its petition-based program drew applications from only 5 to 7 percent of those who qualified. The trend has been toward automatic clearing, though many states still use petitions or a hybrid.
Federal Drug Convictions Cannot Be Expunged
There is no general federal expungement statute. The only relief for a federal drug conviction is a presidential pardon, which requires the applicant to have completed their sentence including any supervised release and to wait at least five years from the date of release, with a seven-year waiting period for more serious drug offenses.10U.S. District Court for the Southern District of Mississippi. How Do I Have My Conviction Expunged? A pardon does not erase the record. It restores certain rights and can carry practical benefits, but the conviction remains visible.
What Is Still Unresolved
The April 2026 reclassification is a real shift, and it is partial. Recreational cannabis businesses without a medical license are still handling a Schedule I substance under federal law, which means Section 280E still applies to them, banking access is still legally murky, and their employees still face the federal conflicts around firearms and drug-free workplace rules. The broader rescheduling hearing beginning June 29, 2026 could widen the change or leave the split intact.
Interstate commerce, federal preemption of state employment protections, and whether the SAFE Banking Act or a similar measure will pass all remain open. The federal scheduling framework rests on the Controlled Substances Act, which classifies drugs into five schedules with Schedule I the most restrictive and Schedule V the least, and gives the Attorney General authority to move substances between them after a binding scientific and medical evaluation from the Secretary of Health and Human Services.11Office of the Law Revision Counsel. 21 USC 812 – Schedules of Controlled Substances12Office of the Law Revision Counsel. 21 USC 811 – Authority and Criteria for Classification of Substances That machinery is what the June hearing will run through, and its outcome will set the next phase of federal drug policy.