Internal Revenue Code § 280E denies ordinary business expenses for any trade or business that traffics in a controlled substance “within the meaning of Schedule I and II of the Controlled Substances Act.” This provision has been catastrophic for the regulated cannabis industry, resulting in billions of dollars in taxes paid on phantom income. However, in recent years, there has been an organized effort by the cannabis industry to push back against the injustice of 280E.
While cannabis has been increasingly successful in these efforts, the regulated psilocybin industry is only just beginning its own battle. Yet cannabis has cut a path that psychedelics like psilocybin can certainly take advantage of. The most current and effective methodology employed by tax professionals to mitigate the fallout from 280E is an argument based on the interpretation of 280E itself.
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280E “ambiguity”
Notably, Congress chose the phrase “within the meaning of” rather than “listed as” a Schedule I or II substance. This subtle but crucial distinction suggests that Congress intended 280E to hinge on whether a substance actually meets the definition of a Schedule I or II drug under the Controlled Substances Act (CSA), rather than simply whether it is listed on those schedules. In other words, if a substance no longer meets the criteria that define Schedule I or II, it arguably is not “within the meaning” of those schedules, regardless of its formal classification.
In case there is ambiguity regarding what Congress meant by the term “within the meaning”, the legal counsel representing New Mexico Top Organics Inc., doing business as Ultra Health, makes a compelling argument in their petition to the tax court. They point out that when Congress wants to reference the DEA’s lists of controlled substances directly, it uses specific and clear language like “listed on” or “listed in.” For instance, in 10 U.S.C. §912a(b)(3), Congress refers to “any other substance… that is listed in schedules I through V of section 202 of the Controlled Substances Act.” Similarly, in 34 U.S.C. §10705(4), the term “schedule II, III, or IV controlled substance” means a controlled substance that is “listed on schedule II, schedule III, or schedule IV of section 812(c) of Title 21.”
These examples demonstrate that Congress is aware of how to refer to the official lists of controlled substances when it intends to do so. However, in Internal Revenue Code Section 280E, Congress did not use this explicit language. Instead, it used the phrase “within the meaning of Schedule I and II.” According to Ultra Health’s legal team, this choice of words suggests that Congress intended for the law to apply only to substances that actually meet the strict criteria of those schedules, criteria such as accepted medical use, safety under medical supervision, and potential for abuse, rather than simply those that appear on the DEA’s published lists.
Why it matters
This argument is significant because it highlights that the IRS should interpret laws like Section 280E in a way that acknowledges current scientific and medical realities, rather than remaining tethered to outdated classifications. Encouragingly, due to the efforts of political leaders, including the Biden Administration, and federal agencies such as the Department of Health and Human Services (HHS) and the Food and Drug Administration (FDA), along with pioneering companies like Trulieve, Canna Provisions, and Ultra Health, the cannabis industry is making real progress in challenging 280E.
But what about other substances that are just beginning to enter this conversation, specifically psilocybin? Psilocybin is increasingly recognized as a legitimate treatment for a variety of mental health conditions, and three states have already passed legislation to create programs for the regulated sale and administration of psilocybin. As these programs roll out and new research continues to emerge, the case for rethinking how we apply 280E to psilocybin businesses also grows stronger.
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Under the Controlled Substances Act, placement in Schedule I requires all three of the following findings: a high potential for abuse, no currently accepted medical use, and a lack of accepted safety for use under medical supervision. Schedule I drugs are considered the most dangerous substances, for example, heroin, which has no recognized medical uses and has proven to be highly dangerous.
Schedule II substances also share the “high potential for abuse” criterion. However, unlike Schedule I, Schedule II substances are recognized to have accepted medical use in treatment, albeit often with strict limitations due to risks of severe psychological or physical dependence. Drugs in Schedule II are typically those that have essential and recognized roles in medical practice, but are still dangerous if misused. Schedule II includes drugs like fentanyl and methamphetamine, powerful medications with serious risks if abused.
Where does psilocybin belong on the CSA?
The question is, does psilocybin satisfy the criteria for either Schedule I or Schedule II today? In the following paragraphs, we’ll examine each of these factors: medical use, safety, and abuse potential. These findings strongly suggest that psilocybin’s risk profile is inconsistent with Schedule I and II substances. This bolsters the argument that Internal Revenue Code Section 280E should not apply to businesses “trafficking” psilocybin, because psilocybin is not a Schedule I or II substance “within the meaning” of the CSA.
In recent years, psilocybin has shown significant promise as a therapeutic substance in clinical research. There is evidence that psilocybin can be an effective treatment for serious conditions like major depression and anxiety disorders, including in patients with treatment-resistant depression. In recognition of this potential, the FDA has twice granted “Breakthrough Therapy” designation to psilocybin-based therapies for depression. Breakthrough Therapy status is reserved for investigational treatments that preliminary clinical evidence indicates may represent substantial improvement over existing therapies.
Randomized clinical trials and peer-reviewed studies have documented psilocybin’s efficacy in a range of applications. For example, research at Johns Hopkins, NYU, and other institutions has found that psilocybin-assisted therapy can produce rapid and sustained reductions in depression and anxiety in patients with life-threatening cancer and can help alleviate existential distress.
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Psilocybin-assisted therapy has shown high success rates in smoking cessation trials and is being investigated for alcohol use disorder and other substance dependencies. In fact, the National Institute on Drug Abuse (NIDA) is funding a large multi-site trial of psilocybin therapy for nicotine addiction, following pilot studies where psilocybin demonstrated remarkable smoking abstinence rates.
It is noteworthy that in a recent 2018 peer-reviewed analysis, Johns Hopkins researchers expressly argued that if ongoing Phase III trials confirm efficacy, psilocybin should be rescheduled from Schedule I to Schedule IV (the category for prescription medications with low abuse risk, akin to many sleep aids). These developments undermine the idea that psilocybin has “no currently accepted medical use.”
A second Schedule I criterion is the “lack of accepted safety for use under medical supervision.” Psilocybin’s safety profile in controlled settings is favorable, especially when compared to other psychoactive substances.
According to NIDA, “psilocybin has a low level of toxicity,” meaning it carries minimal risk of acute physiological harm such as respiratory failure or cardiac arrest. There is no known lethal overdose level for psilocybin in humans, placing it among the lowest of all drugs in terms of potential for fatal overdose. In practical terms, this means that, unlike opioids or even alcohol, psilocybin does not impair vital functions at any reasonably achievable dose.
Notably, the primary risks associated with psilocybin tend to be behavioral or psychological in nature, and these are highly manageable with proper supervision. For example, during an unsupervised “bad trip,” a disoriented individual might engage in dangerous behavior or experience acute panic; however, these risks are effectively mitigated under professional supervision.
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A comprehensive review of psilocybin’s abuse potential, published in Neuropharmacology, concluded that the adverse effects of medical psilocybin are manageable when administration follows strict risk-management protocols, including preparatory counseling or orientation, controlled set and setting, and post-session integration. Indeed, serious adverse events in modern psilocybin studies have been exceedingly rare, with virtually all studies reporting that subjects tolerate supervised sessions without any long-term adverse health effects.
These findings indicate that psilocybin is far from having “no accepted safety” under medical supervision. In fact, psilocybin is already being used in research settings for vulnerable populations, including those suffering from PTSD, and in clinics across states like Oregon, where regulated psilocybin services have been established.
The final Schedule I criteria is whether the drug has a “high potential for abuse.” All indications are that psilocybin’s abuse or addiction potential is very low, especially when compared to prototypical drugs of abuse. Classic psychedelics like psilocybin do not engender the compulsive use patterns that drugs such as opioids, stimulants, or alcohol do.
In animal models, laboratory rats given the opportunity to self-administer psilocybin do not repeatedly dose themselves in the way they do for cocaine or heroin. This suggests psilocybin does not strongly activate the brain’s reward circuitry that leads to drug-seeking behavior.
Human users show a similar pattern; surveys indicate that among people who use psilocybin mushrooms, it is typical to use them only a handful of times in a lifetime or very infrequently. There is no binge-use phenomenon; in fact, psilocybin’s rapid tolerance buildup makes daily or habitual use ineffective, inherently limiting its potential for abuse.
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Research shows psilocybin should be rescheduled
It is ironic that a Schedule I substance, purportedly with high abuse potential, is being actively studied as a treatment for addiction. This fact is fundamentally at odds with the label “high potential for abuse.”
This argument that psilocybin does not meet the definition of a Schedule I or II substance is compelling, especially given modern scientific findings on its medical potential, safety under professional supervision, and low risk of abuse. As states begin to regulate psilocybin for therapeutic use and as research continues to affirm its benefits, the rationale for treating psilocybin businesses as “trafficking” under 280E grows increasingly outdated and unjust. Ultimately, the law should reflect reality.
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Just as courts and federal agencies are finally beginning to acknowledge that cannabis does not fit the meaning of a Schedule I or II drug, psilocybin deserves the same careful reevaluation. With businesses in Oregon, Colorado, and New Mexico already cultivating new economic and therapeutic opportunities under state-regulated programs, the federal government, particularly the IRS, has a choice to make: to cling to outdated prohibitions or to embrace a common-sense interpretation that honors both science and fairness.
In the end, it is not just about psilocybin or cannabis; it is about aligning the law with the truth of what these substances can offer, and with the vision of a more just, compassionate, and economically balanced future.
*This article was submitted by a guest contributor. The author is solely responsible for the content.