It's an extremely common misconception, but it isn't legal in the NL. It is tolerated through an official policy called "gedoogbeleid" in which it is effectively legal for people over 18 to buy up to 5 grams at a time in a coffeeshop. It's that famous Dutch tolerance.
However, there are some key differences with the situation in the US. In the Netherlands, the supply to the coffeeshops is still very much illegal; it's a "mystery" how the shops are supplied, but they've got the product (max 500g at any given time), and it's tolerated for them to sell it to the public. Supply however remains under the table. Enforcement is rigid, if they're over the 500g limit, selling to minors, or selling other hard drugs then they can be swiftly shut down.
The Dutch government at the highest levels is increasingly regressive; they've even begun to criminalize supporting the growing of cannabis, which is absurd when you see that innocent garden supply shops are now potentially liable. At the municipal level in the largely pro-cannabis cities (e.g. Amsterdam, Rotterdam), there have been plans to try regulated and tolerated growing. The national government however emphatically rejects these plans and prevents it from happening. Some councils (especially in the south near Belgium) have enacted resident-only restrictions, which has the not-unsurprising effect that nuisance street dealing picked up. The government tried to enact this nationwide, but many cities refused and there are usually no residence restrictions except for certain areas.
(Interesting fact: only 35% of visitors to Amsterdam visit a coffeeshop. It's a big, inaccurate stereotype that the Dutch are stoned all the time or that Amsterdam is all about weed. Americans smoke a lot more than the Dutch do, much to many visitors' surprise.)
