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Special Report The 2026 Cannabis Wildcard: How Tax Reform Could Reset Stock ValuationsAuthored by Jeffrey Neal Johnson. Originally Published: 12/30/2025. 
What You Need to Know- The removal of punitive federal tax codes would allow cannabis operators to deduct standard business expenses and finally generate sustainable free cash flow.
- Canopy Growth has successfully transitioned to an asset-light business model while securing strategic assets to trigger immediate entry into the American market.
- Tilray Brands leverages a robust craft beverage division to ensure financial stability and growth while maintaining a global footprint in the medical cannabis sector.
As the 2025 trading year draws to a close, the cannabis sector presents a confusing picture for many investors. On Dec. 18, 2025, President Trump signed a pivotal Executive Order directing the Attorney General to expedite the rescheduling of cannabis. By traditional measures, that political victory should have sparked a sustained rally. Instead, the market reacted with a sharp sell-the-news correction. Leading equities in the space have retreated significantly and are trading near their yearly lows. That price action suggests a market suffering from exhaustion: investors, weary after years of bureaucratic delays and false starts, largely discounted the long-term implications of the order and focused on the absence of immediate, overnight legalization. Still, experienced analysts argue this pessimism creates a contrarian opportunity. The market is pricing cannabis stocks as if regulatory reform has already failed, even though evidence points to a meaningful regulatory shift in 2026. The disconnect between depressed valuations and improving political odds has produced an oversold condition. While the crowd is selling, fundamentals for 2026 suggest the sector may be poised for a reversal. The Macro Catalyst: From Red Tape to Green CashThe potential turnaround in 2026 centers on tax law. The wildcard scenario depends on the administration moving cannabis from Schedule I to Schedule III under the Controlled Substances Act. Though it may sound like a technical change, that shift would act like a sizable corporate tax cut for the industry. Today, U.S. cannabis operators (and companies preparing to enter the market) are hamstrung by IRS Section 280E. That code disallows deductions for standard business expenses for businesses trafficking in Schedule I or II substances. - The Current Problem: A typical business deducts rent, payroll and utilities before calculating taxes. Cannabis companies cannot; they are taxed on gross profit, which can push effective tax rates above 70% and destroy cash flow.
- The 2026 Solution: If cannabis is reclassified to Schedule III, Section 280E would no longer apply. Companies could deduct ordinary operating costs.
For the stock market, this is the pivotal variable. Removing 280E would transform industry economics, turning many cash-burning businesses into free-cash-flow generators. If the December Executive Order culminates in a finalized rule in 2026, valuations would likely reset to reflect that more profitable reality. Canopy Growth Corporation: The Aggressive U.S. BetFor investors seeking aggressive exposure to a potential U.S. reopening, Canopy Growth Corporation (NASDAQ: CGC) remains a primary vehicle. Over the past two years the company has shifted toward an asset-light model, divesting heavy cultivation facilities to reduce overhead and preserve capital. Canopy's thesis centers on Canopy USA: a structure that lets the company hold economic interests in U.S. assets while maintaining NASDAQ compliance. The strategy is binary — once federal rescheduling permits, Canopy USA could complete acquisitions of those U.S. assets and consolidate their revenue. Meanwhile, Canopy has continued executing on its strategy. On Dec. 15, 2025, the company announced the acquisition of MTL Cannabis. - Supply Chain Security: The deal secures a consistent, high-quality flower supply, critical for retaining market share in Canada.
- Export Capability: MTL strengthens Canopy's ability to serve international medical markets, providing a revenue bridge while the U.S. strategy matures.
Combined with a cost-reduction program delivering roughly $21 million in annualized savings, Canopy has positioned itself to weather current volatility and scale quickly if the regulatory landscape shifts. Tilray Brands: The Diversified FortressTilray Brands, Inc. (NASDAQ: TLRY) offers a different value proposition: stability through diversification. Rather than placing a single regulatory bet, Tilray operates on three pillars — Cannabis, Wellness and Beverage Alcohol. If political delays extend into 2026, Tilray has a built-in safety net. After a series of 2024 acquisitions, the company is now the fifth-largest craft brewer in the U.S., with brands like Hop Valley and Terrapin. Revenue from craft beer and spirits provides reliable cash flow that cushions Tilray from cannabis volatility. The company is also executing Project 420, aimed at streamlining operations and delivering multi-million-dollar savings across its beverage and cannabis lines. Management has also acted to tidy the capital structure: on Dec. 1, 2025, Tilray completed a 1-for-10 reverse stock split. - Institutional Access: Many large funds cannot buy stocks trading under $5. Raising the share price reopens access to institutional capital.
- Compliance: The split helps ensure long-term NASDAQ compliance and reduces the risk of delisting.
Tilray also maintains a strong European presence, holding a cultivation license under Germany's new Cannabis Act. That international footprint lets the company grow revenue irrespective of U.S. developments. The Bear Trap: Anatomy of a Short SqueezeBoth Canopy Growth and Tilray are trading at historically low valuations relative to sales. Despite those bargain prices, short interest — shares borrowed by investors betting on price declines — remains elevated. Short sellers are effectively wagering that the federal government will fail to follow through on rescheduling, which creates a high-risk setup for the bears. - The Trap: A definitive positive event, such as the DEA publishing a final Schedule III rule, would undermine the short thesis.
- The Scramble: Shorts would need to buy shares to cover positions and exit trades.
- The Squeeze: That forced buying can create a feedback loop: as shorts cover, prices rise and force more covering.
Given overwhelmingly negative sentiment, even limited good news could trigger that chain reaction. Heavy short positioning is like dry powder: a regulatory spark could ignite a rapid and pronounced upside move. 2026 Outlook: Time for ExecutionWhere 2025 was defined by waiting, 2026 looks to be about execution. Companies are leaner, cost structures are improved, and the President has issued a direct order to cut regulatory red tape. Investors now face a binary window. If the administration follows through, eliminating the 280E tax burden could justify materially higher stock prices. The sector has shifted from hope to potential implementation — current prices carry risk but may also represent a historic discount if this political wildcard plays out in the industry's favor.
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