When I drag or drop photos into Photoshop, or add them via the File > Place command, they are created as smart objects but the embedded asset is still a JPG. How can I convert these embedded smart object JPGs to PSB? If I save to a different format it just ignores the changes. Thanks!
You could always open your JPG first, then save it out as a PSB (File > Save As > Large Document Format *.psb)...
Then rather than placing the JPG place the resulting PSB instead.
I have to say though: A JPG as a Smart Object can already be edited non-destructively... so I don't really see what your issue is.
I was also having issues with this. You can bypass the problem by double converting the smart object.
For example, when you "Place Embedded" the .jpg is imported as a smart object. Right click and select "convert to smart object". This will effectively make the smart object a smart object. Now when you expand the layer the previous jpg will open as a psb. You can of course open that smart object and it will be a .jpg, but it is a quick solution to the issue.
Placing a jpeg will result in a jpeg as a smart object - there's no way around that, other than not placing a jpeg. A jpeg has no support for layers, even when it is a smart object. (I like to call this a Not-So-Smart Object).
If you attempt to add something like an adjustment layer inside the smart object, Photoshop will prompt you to save it when closing the image. Try it yourself. However, when you close the jpeg, it won't update with the newly saved file. This is yet another example of Photoshop again not being very smart at all, more like a dumb computer program.
There are many methods that could be used to avoid that nonsense, which others have touched on here, but here's another simple method.
Open the jpeg using File > Open, then Ctrl/Cmd+A to select all, then copy Ctrl/Cmd+C). Then in your other document hit paste (Ctrl/Cmd+V). Then right click the layer and convert it to a smart object. Now it will be a PSB!