Nitrous oxide is a colourless gas also known as laughing gas, which is used as a painkiller in medical and dental procedures.
But if it is not used correctly, it can potentially cause long-term health damage.
Health Minister Shane Reti said it was illegal to sell it for recreational use, but vape stores include it in products known as nangs, for its psychoactive effect.
"Nitrous oxide has several legitimate uses, but we also know it is increasingly being used as a recreational drug," he said.
"Smokefree enforcement officers have even reported seeing nitrous oxide products - nangs - for sale in vape stores. This is extremely concerning.
"Given the significant risks and the potential for long-term damage, and a number of overlapping portfolios in this area, last month I requested officials look at options on the government's behalf to address it.
"Last week, I received advice from the Ministry of Health about a change in approach that would clarify the law for suppliers and users of nitrous oxide. This will enable police to prosecute the sale and use of nitrous oxide for recreational use."
Whereas nitrous oxide had been considered under the Medicines Act 1981, Medsafe now advises that when it is sold primarily for the purpose of inducing a psychoactive effect, the Psychoactive Substances Act 2013 applies.
No products containing nitrous oxide have been approved for use under the Psychoactive Substances Act, making it illegal to sell nitrous oxide or products containing nitrous oxide for recreational use. A breach of this regulation is punishable by either prison time or a fine.
"The proliferation of nangs - particularly targeted at our young people - is a significant public health issue with potentially serious consequences," Dr Reti added.
"Police and health professionals have reported recreational use of nitrous oxide is on the rise, a trend seen in other countries like Australia and the UK.
"This reinforces the gravity of the situation and the need for swift action. This cannot continue.
"I have directed the Ministry of Health to monitor the effectiveness of this change and provide ongoing advice about whether further restrictions are necessary to keep New Zealanders safe."
