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Cutaneous lupus erythematosus (CLE) is a heterogeneous autoimmune skin disease which occurs independently and in conjunction with systemic lupus erythematosus. Drug development for CLE is severely lacking. Anandamide (AEA) is a primary endocannabinoid which exhibits immunomodulatory effects through mixed cannabinoid receptor agonism. We evaluated AEA as topical treatment for CLE and assessed benefits of nanoparticle encapsulation (AEA‐NP) on cutaneous drug penetration, delivery and biological activity. Compared to untreated controls, AEA‐NP decreased IL‐6 and MCP‐1 in UVB‐stimulated keratinocytes (p < 0.05) in vitro. In BALB/c mice, AEA‐NP displayed improved cutaneous penetration, extended release and persistence of AEA in the follicular unit extending to the base after 24 h. Utilizing the MRL‐lpr lupus murine model, twice weekly treatment of lesions with topical AEA‐NP for 10 weeks led to decreased clinical and histologic lesion scores compared to unencapsulated AEA and untreated controls (p < 0.05). Prophylactic application of AEA‐NP to commonly involved areas on MRL‐lpr mice similarly resulted in decreased clinical and histologic scores when compared to controls (p < 0.05), and reduced C3 and IBA‐1 in lesional tissue (p < 0.05). The demonstrated clinical and immunomodulatory effects of treatment with AEA support its potential as therapy for CLE. This work also suggests that encapsulation of AEA improves penetration and treatment efficacy. Future studies will be conducted to assess full therapeutic potential. [ABSTRACT FROM AUTHOR]