Impact of Cannabis Rescheduling, 280E Elimination, and Hemp Loophole Closure on $MSOS and Cannabis Sector

This analysis is based on the December 18, 2025 Executive Order directing cannabis rescheduling and federal hemp-derived THC ban legislation, with market data from the AdvisorShares Pure US Cannabis ETF ($MSOS) [0]. The EO’s direction to reschedule cannabis to Schedule III would eliminate IRS Section 280E, which previously prohibited regulated operators from deducting ordinary business expenses, resulting in effective tax rates of 70-90% [1][2]. Concurrently, federal legislation banning hemp-derived THC products (effective November 2026) will close a loophole that allowed unregulated, low-cost THC alternatives, theoretically boosting market share for compliant operators [3][4].

However, $MSOS’s price fell 31.51% on December 18, 2025 (from $6.69 to $4.89), with minimal recovery on December 19 ($4.88 close), despite the 6-month performance showing a +118.52% gain [0]. This negative reaction stems from two critical factors: the EO does not immediately reschedule cannabis (requiring DOJ rulemaking, public comment periods, and potential delays into 2026) and it does not include full adult-use legalization, which investors had increasingly priced in [1][2].

1. Delayed Benefits vs. Immediate Market Disappointment
   : The tax reduction and competitive relief from loophole closure are not immediate—rescheduling could take months, and the hemp ban takes effect in November 2026. Investors reacted to the gap between the EO’s scope and overly optimistic expectations.
2. ETF Vulnerability to Sentiment Shifts
   : As a pure-play on regulated US cannabis operators, $MSOS is highly sensitive to regulatory news. Its market cap ($802.75M) [0] and focused holdings mean sentiment-driven price swings are amplified compared to broader sector funds.
3. Regulatory Uncertainty Remains
   : Even with rescheduling, operators face risks like state-federal tax conformity issues, potential litigation against the hemp ban, and ongoing restrictions on interstate commerce [1].

• Implementation Delays
  : DOJ rulemaking for rescheduling could extend beyond 2026, delaying tax relief [1][2].
• Hemp Industry Pushback
  : The hemp ban may face legal challenges from hemp producers, threatening its effective date [3].
• Unmet Expectations
  : Market sentiment could further sour if subsequent regulatory actions do not include adult-use legalization or interstate sales.
• Tax Conformity
  : States may not align with federal tax changes, limiting the full benefit of 280E elimination [1].

• Profitability Surge
  : For operators, the shift to 21% corporate tax rates could drastically improve cash flow once 280E is eliminated [0].
• Market Share Gains
  : The hemp ban will redirect THC consumers to regulated products, supporting top-line growth for compliant operators [3].
• Institutional Investment
  : Rescheduling could open cannabis investments to larger institutional funds that previously avoided Schedule I assets.

• Event Timeline
  : December 18, 2025 EO directs rescheduling; November 2026 hemp ban effective date.
• $MSOS Performance
  : December 18, 2025: -31.51% ($6.69 → $4.89); 6-month return: +118.52% [0].
• Policy Impact
  : 280E elimination cuts tax rates to 21%; hemp ban reduces unregulated competition.
• Core Uncertainties
  : Rescheduling timeline, legal challenges to the hemp ban, and regulatory scope beyond tax relief.
• Market Reaction
  : Short-term disappointment due to delayed benefits and unmet legalization expectations overshadowed long-term positive fundamentals.