In 5th Edition D&D, Elves have Fey Ancestry which prevents magic from putting them to sleep.

If a group of enemies had a potion that they threw which turned into a smoke upon contact with the air and puts people to sleep inside its area of effect, would that affect Elves at all?

Essentially, are all potions magic and, as a result, all potion effects normally prevented by a racial ability are also prevented regardless of whether their origin was a casting or a "spell" effect imbued into a potion?

What about potions created with a Herbalism Kit? Are those still considered magical, or are they mundane and therefore bypass the Elvish resistance?

I think that the intention is that Elves are immune to sleep generally - since they don't sleep naturally and magic can't force it on them.

However, that does not make them immune to the Unconscious condition (source).

Given that their trance does not cause them to go unconscious (they can even concentrate on spells while in trance - source), but they can be afflicted by it, I'd say a potion that causes unconsciousness (but not sleep) works - such as one you'd need for a surgery. Because herbalism is easier for most people than magical healing.

Interesting sidepoint: Elves can benefit from Catnap.

Thanks for the responses.  At the heart of it is largely whether or not Herbalism Kits create magic potions or whether they create potions based on the tenets of whatever herbal/natural world chemistry that elicits the responses.

The wording around potions and magic effects in 5e isn't as explicit as it was in prior versions (by design no doubt) and I appreciated the feedback from my group today who added, "do what serves the story." While I love that, I want to ensure that folks feel like the racial abilities of their characters are being respected. Straying too far could unravel some of the fun awarded by selecting that race or class after all!

If the question is about whether potions are magical or not, the answer is simpler (with a caveat):

Every potion in the Dungeon Master's Guide is a magic item (they all are in the Magic Item listing).

The Potion of Healing in the Player's Handbook (page 153) also mentions it is magical.

However, the Herbalism Kit can also be used to make Antitoxin, which is not a magical item.

So, I'll side with your players. You can make both magical and non-magical items through a Herbalism Kit (although note that the kit alone and proficiency to it may not be sufficient for such creations), so you can make whatever suits the story without worrying you're conflicting a rule somewhere that you'd rather avoid messing with.

Thankfully, there’s no conflict about it. It’s really just one of those things that was explicit in 3.5e that’s a bit less so in 5e largely for the better. 

Thanks again for the responses.