The 2026 Cannabis Tax Reform: A Structural Inflection Point for Equity Valuation

The cannabis sector stands at a pivotal crossroads in 2026, with federal tax reform poised to redefine its financial landscape. For contrarian investors, the removal of IRS Section 280E-a provision that has historically barred cannabis companies from deducting ordinary business expenses-represents not just a regulatory shift but a structural inflection point.

This change could unlock free cash flow for the first time, enabling companies like Canopy Growth Corporation (CGC) and Tilray Brands (TLRY) to reset valuations and attract institutional capital. With short interest and institutional ownership dynamics already signaling market skepticism and emerging confidence, the case for early entry into these oversold leaders is compelling.

The Tax Reform Catalyst: Removing Section 280E

The U.S. cannabis industry's effective tax rate has long exceeded 70% due to Section 280E, which prohibits businesses from deducting costs like payroll, rent, and marketing. According to MarketBeat, the reclassification of marijuana from Schedule I to Schedule III under the Controlled Substances Act could eliminate this burden, allowing operators to deduct standard expenses and significantly improve net margins. For Canopy Growth, which reported a Q2 FY2026 adjusted EBITDA loss of $3 million CAD-a 63% improvement from the prior year-this reform could transform its cash flow profile. Similarly, Tilray Brands, despite a $2.2 billion net loss driven by impairment charges, projects fiscal 2026 Adjusted EBITDA in the range of $62–72 million.

Contrarian Indicators: Short Interest and Institutional Access

Short interest data reveals a stark divide between market sentiment and fundamental potential. As of November 14, 2025, Tilray's short interest stood at 8.86% of its public float, with a days-to-cover ratio of 2.4 according to MarketBeat. For Canopy, short interest peaked at 18.19% in the prior month but has since declined to 9.08%, reflecting a 15.7% reduction. These figures suggest growing skepticism among short sellers, yet they also hint at a potential short squeeze if the sector rallies ahead of tax reform.

Institutional ownership trends further validate this narrative. Tilray's institutional ownership in Q4 2025 reached 9.35%, with major investors like Tidal Investments LLC and Vanguard Group Inc. increasing stakes. Canopy, meanwhile, saw Millennium Management LLC boost its holdings by 196.9% in Q4 2025, while UBS Group AG and TD Asset Management Inc. also added to their positions. These moves signal institutional confidence in the companies' ability to capitalize on regulatory tailwinds.

Valuation Reset Potential: EBITDA, Free Cash Flow, and Industry Multiples

Forward-looking financial models underscore the magnitude of the valuation reset. Canopy's Q2 FY2026 revenue rose 12% year-over-year to $67 million CAD, driven by high-margin products like vapes and pre-rolls. With $298 million in cash and equivalents, the company has resolved concerns about its going-concern status. Analysts project Canopy's free cash flow could reach $17 million by 2030, while Tilray's is expected to grow from $14.8 million in 2026 to $43 million by 2030 according to Yahoo Finance.

The removal of Section 280E would amplify these metrics. For instance, Tilray's gross margin in Q4 FY2025 improved to 31%, and its craft beverage division contributed $10.2 million in Adjusted EBITDA. If tax reform allows full expense deductions, its EBITDA margins could expand further, aligning with industry multiples that currently undervalue cannabis operators.

Strategic Positioning: Canopy and Tilray in a Post-Reform Landscape

Canopy's asset-light model and strategic focus on the U.S. market position it to scale rapidly if federal policy changes. Its leaner structure, combined with $21 million in annualized cost reductions, suggests a path to profitability according to Yahoo Finance. Tilray's diversified approach-spanning cannabis, wellness, and alcohol-provides financial stability, though its cannabis segment revenue declined 9% in the most recent fiscal year. A 1-for-10 reverse stock split in 2025 has also improved its institutional appeal by raising its share price above $5.00.

Conclusion: A Contrarian Opportunity

The 2026 cannabis tax reform is not merely a regulatory adjustment but a catalyst for sector-wide valuation resets. With short interest acting as a contrarian indicator and institutional ownership signaling emerging confidence, oversold leaders like Canopy Growth and Tilray Brands present compelling entry points. As the industry transitions from a cash-burn model to one of sustainable free cash flow, early investors stand to benefit from a re-rating that could outpace broader market expectations.