Cannabis Trends in 2025

2024 was a primarily lean and flat year for the U.S. cannabis industry. The state-legal cannabis industry has been volatile from its inception, and 2024 represented a year of winnowing with many cannabis businesses failing. 2025 has some light on the horizon, though, with the prospect of the Drug Enforcement Administration’s (“DEA”) rescheduling of cannabis from Schedule I to Schedule III. 

Until that occurs though, you can expect that cannabis in 2025 will be just as rocky as in 2024. Rocky doesn’t mean unsuccessful though. There are still opportunities across the board for investors and business operators, from state-by-state expansion to purchasing cannabis assets for pennies on the dollar in some cases.

As we rev up in 2025, here’s what I see as the main issues/events to watch (and maybe act on) in the industry:

Cannabis Litigation is Going to Evolve

For years, “cannabis litigation” didn’t exist because business was conducted in the shadows and without enforceable agreements and cannabis companies didn’t carry any kind of insurance. Fast forward into the 2010s, and we began to see commercial cannabis litigation emerge around breached contracts and business ownership disputes for state-licensed companies. In 2025, I personally think that we’re going to see even more litigation emerge for investment fraud, labor and employment compliance and disputes (both wage and hour lawsuits and workplace safety lawsuits), negligence, and products liability. And then of course you have your ongoing constitutional battles regarding the illegality of cannabis, and I’ll be sure to keep watching the landmark case of Canna Provisions Inc. v. Garland, which just had oral arguments before the United States Court of Appeals for the First Circuit on December 5.

More Cannabis Insolvency is on the Way

Some multi-state cannabis operators are facing a giant debt wall come 2026. And due to the federal illegality of cannabis, cannabis companies cannot pursue bankruptcy relief in federal court, which leads to insolvency alternatives, like assignments for the benefit of creditors or receiverships. There have been few cases of successful restructuring once a cannabis company becomes insolvent, but the opportunities for buying up distressed cannabis assets has probably never been better, like it or not. With investor momentum still relatively stymied and cost-prohibitive borrowing rates, 2025 will yield another yield of large-scale failures across the cannabis industry. But throughout this year, savvy investors and buyers that know the ins and outs of state cannabis laws will likely have multiple shots at buying up or foreclosing upon once valuable operations to turn them around or sell them off (it just won’t be through the bankruptcy process).

Rescheduling Drama

The overall consensus in the cannabis industry is that it’s a “when” and not an “if” when it comes to the DEA moving cannabis from Schedule I to Schedule III on the Controlled Substances Act (“CSA”). A second Trump presidency may or may not have an impact on this administrative process, no one can really know at this point since it hasn’t even commenced yet. One thing is for sure though, the rescheduling hearing (that is dedicated to the receipt of “factual evidence and expert opinion testimony regarding whether marijuana should be transferred to Schedule III under the CSA”) is set to commence on January 21 and will run though March 6 of this year. The December 4 prehearing ruling issued by Administrative Law Judge John Mulrooney lays out the ground rules for the rescheduling hearing and it also sets forth the witness list of those who will provide direct testimony at the hearing (and who will also be cross-examined). If we actually see a final rule on rescheduling in 2025, I will be pleasantly surprised as, in my experience, the government doesn’t do anything quickly let alone rescheduling controlled substances. To see more about our takes on rescheduling, see here, here, here, and here.

More Audits Under IRC 280E for Lack of “Reasonable Basis”

On December 12, 2024, the Internal Revenue Service (“IRS”) announced its continued efforts to pursue companies evading tax obligations, and specifically those with “complex returns”. In its announcement, the IRS focused on those companies that file Form 8275 disclosure statements. These forms “are used by taxpayers and tax return preparers to disclose items or positions, except those taken contrary to a regulation, that are not otherwise correctly disclosed on a tax return in order to avoid certain penalties such as: . . . Substantial understatement of income tax for non-tax shelter items if the return position has a reasonable basis.” Importantly, the IRS goes on to state that

“Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is only arguable. In its review of Form 8275 filings, the IRS has identified multiple filings that do not qualify as adequate disclosures that would justify avoidance of penalties. Form 8275 is not intended as a free pass on penalties for positions that are false.

Most damning though is one of the specific examples given by the IRS for a lack of reasonable basis, which is:

“Some disclosures received with respect to section 280E which disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.

• This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana.
• Section 280E does not prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.
• A review of Form 8275 filings has revealed that some taxpayers have taken the position of disregarding the section 280E limitation using a variety of rationales that do not constitute reasonable basis.

For those cannabis companies that have a high risk tolerance that tried to avail themselves of 8275 filings in an effort to get out of the trappings of 280E despite not having any reasonable basis or reasonable basis that is merely “arguable”, we may see the hammer of the IRS come down hard this year given that the agency is prioritizing enforcing against such tactics.

Intoxicating Hemp Whack-A-Mole Continues

Given that the 2018 Agricultural Improvement Act (“Farm Bill”) has been extended through this year, we’re going to see more states play intoxicating hemp whack-a-mole, especially when it comes to “THC Beverages“.  

The Farm Bill technically allows for non-synthetic, hemp-derived intoxicating cannabinoids so long as the pre-harvest hemp contains less than .3% THC. The broad definition of hemp in the 2018 Farm Bill (combined with pre-harvest testing requirements) created an entire consumer products industry dedicated to intoxicating hemp, with “THC beverages” leading the charge. This is partly due to the fact that, while the United States Department of Agriculture oversees hemp production, there is no federal agency that currently controls post-production intoxicating hemp processing and its resulting products (although the U.S. Food and Drug Administration and the Federal Trade Commission have become increasingly vocal about intoxicating hemp that’s packaged and label to be attractive to minors or that copycats popular food products).

While Congress has not done anything to address intoxicating hemp, states are picking up the mantle to regulate or ban accordingly. California, for example, has a total ban on intoxicating hemp while Minnesota embraced it with regulation. And other states, like Wisconsin, do not have intoxicating hemp-specific regulations but allow such products to be on retail shelves (so long as they follow existing food safety laws). In 2025, we’re going to see more and more how individual states handle intoxicating hemp, whether or not they also have state-licensed cannabis operators, which will include litigation around the states’ ability to ban intoxicating altogether.

The Industry Should be on its Toes in 2025

I hope that 2025 is a banner year for the cannabis industry. With the prospects of rescheduling and new states opening up for business (likely through legislative processes at this point) and current states maturing, 2025 could have some shining moments compared to the overall bleakness of 2024. While there will still be challenges due to illegality, cannabis businesses should be planning now for how to weather those trying times. Whether that involves reviewing your product recall procedures, reviewing compliance plans, raising funds, or strategically planning for reporting under 280E, cannabis companies should not be in “wait and watch” mode this year.