You Went Legal. The Federal Government Rewarded You With a 70% Tax Rate.

Legal cannabis operators paid $2.24 billion in excess federal taxes in 2025. The illicit market paid zero. That is not a coincidence. That is policy.

If you run a legal cannabis business and you feel like the system is working against you, the numbers back you up.

A refreshed analysis from Whitney Economics, released this week, puts hard figures on what operators across the country already know in their bones. Because cannabis remains a Schedule I controlled substance under federal law, state-licensed cannabis businesses cannot deduct ordinary business expenses on their federal tax returns. No labor deductions. No legal fees. No marketing, security or banking costs. Nothing that any other American business takes for granted.

The result is an effective federal tax rate that can approach 70% or more, particularly for retail operators. And the cumulative damage is staggering.

What 280E actually means for your business

Section 280E of the Internal Revenue Code was written in the 1980s to prevent drug traffickers from deducting business expenses. It was punitive by design, intended as a financial weapon against the illicit trade. Four decades later, it is being applied to state-licensed, tax-paying, compliance-following legal cannabis businesses while the illicit market it was designed to target operates completely outside its reach.

The legal operator files taxes. The illicit operator does not. The legal operator absorbs 280E. The illicit operator prices without it. Then everyone wonders why the illicit market keeps winning on price.

“The amount of additional taxes cannabis operators pay is staggering. In 2025, there was an estimated $2.24 billion in excess cannabis-related federal taxes due to the IRS’s 280E tax policy. The industry is being taxed out of business.”

Beau Whitney, Chief Economist, Whitney Economics

Would rescheduling fix this?

The short answer is: maybe, and not immediately.

If cannabis is moved to Schedule III, the prevailing argument is that 280E would no longer apply, since the code was written to target Schedule I and II substances. That would allow operators to deduct ordinary business expenses like any other industry: labor, rent, marketing, legal fees, security. Cash flow improves. Valuations go up. Investment becomes more realistic.

But that outcome is not guaranteed. The IRS would need to issue formal guidance confirming that 280E no longer applies to rescheduled cannabis businesses. That guidance has not been issued. Some tax attorneys have warned that the IRS could take the position that 280E still applies in certain contexts, or that existing tax liabilities from prior years remain enforceable regardless of rescheduling. As High Times has previously reported, rescheduling raises as many questions for operators as it answers.

Rescheduling is also not legalization. It does not open interstate commerce, fix banking access, expunge criminal records or neutralize state-level restrictions. The full picture of what Schedule III actually means for operators in practice is still being written, and the people writing it are largely not from this industry.

What is not uncertain is the current damage. $2.24 billion last year. $15 billion since 2018. Whatever rescheduling ultimately delivers, those numbers are real and they are not coming back.

<p>The post You Went Legal. The Federal Government Rewarded You With a 70% Tax Rate. first appeared on High Times.</p>