Prediction Market Tax Proposals Gain Momentum in State Houses

Initiatives to regulate and tax prediction markets are accelerating in the closing weeks of state legislative sessions, with many lawmakers denouncing the fast-growing trading platforms as a form of unlicensed and unregulated gambling.

State lawmakers contend the markets resemble sports wagering that has been regulated and taxed in 38 states since 2018, when the US Supreme Court struck down the Professional and Amateur Sports Protection Act. Kentucky acted first, passing legislation last week regulating prediction markets and imposing an excise tax on transaction fees. Similar bills are gaining momentum in Illinois, Iowa, and New Jersey.

At least nine additional states are considering action as wagering continues to explode on the markets, which allow players to trade contracts based on the outcome of real-world events including elections, economic data, and sports games. Last year trading volume hovered around $1.2 billion per month, but that has surged to $20 billion per month in 2026, according to a report by the analytics firm TRM Labs. Nearly 90% of the trading is on just two platforms, Kalshi and Polymarket.

“I think a lot about the revenue that could be going to the state,” said Illinois state Sen. Michael Hastings (D), sponsor of a bill (SB 4168) that imposes annual licensing fees and a privilege tax of 50% of a platform operator’s adjusted gross receipts. “You are looking at a ridiculous amount of money changing hands in an unregulated market.”

The road to state regulation and taxation, however, could prove bumpy. The Coalition for Prediction Markets, whose members include Coinbase, Kalshi, Robinhood, and Underdog, said it supports “a strong federal standard” rather than a patchwork of state laws. The coalition accused lawmakers in Kentucky and Iowa of “unlawful state overreach” and aggressive tax strategies that will “force legitimate, regulated platforms to shut down.”

The states and the markets are already trading punches in more than 20 lawsuits, including a criminal complaint filed by the Arizona attorney general against Kalshi. The key question in the litigation is whether the markets operate as online betting parlors regulated under state law or financial derivatives exchanges regulated under federal law.

The federal Commodity Futures Trading Commission joined the fray last week, suing Arizona, Connecticut, and Illinois. The CFTC asserted it maintains “exclusive regulatory authority” over the markets.

“I see more states enacting statutes taxing prediction markets, and I don’t know why they wouldn’t if they’re already taxing sports betting,” said Andrew Appleby, a tax law professor at the University of Tennessee’s Winston College of Law. “But it’s going to be messy because sports betting and prediction markets are different models, and we also have this intervention by the federal government. That has to play out before you get into regulating and taxing this industry.”

Taylor Swift, Greenland, Mars?

Prediction market betting options are vast, requiring different degrees of patience and risk. In addition to several screens of questions about the outcome of basketball, tennis, and golf competitions, a recent review of the Kalshi market found brisk business asking: Where will Taylor Swift and Travis Kelce’s wedding occur? Will the US take control of any part of Greenland before Jan. 21, 2029? And, will humans colonize Mars before 2050?

More than a dozen states including California, Connecticut, Georgia, Hawaii, Kentucky, Minnesota, New York, Tennessee, Vermont, and Virginia, are considering bills regulating some aspect of these markets, said Heather Morton, a senior fiscal affairs fellow at the National Conference of State Legislatures.

Several of the states are seeking to regulate the markets by prohibiting betting on catastrophic events and certain political outcomes, while others want to restrict betting by minors. Many of the bills pull prediction markets into state gambling statutes and subject the platforms to taxation.

Iowa’s bill (SF 2470), which passed the state Senate March 31, requires markets to pay $20 million for an operating permit and an annual renewal fee of $100,000, as well as a 20% tax on their adjusted revenues. The Kentucky bill (HB 757) awaiting Gov. Andy Beshear’s signature would levy a 17.25% tax on each platform’s transaction fees.

Litigation Risk

Any new state laws taxing prediction markets are likely to run into a gantlet of litigation because the business model doesn’t align neatly with existing sports betting frameworks, Appleby said.

Most states tax sporting activities by platforms like DraftKings Inc. and FanDuel Inc. on gross gaming revenue. Their authority rests on the assumption that the betting platforms act like casinos absorbing all of the transactional risk.

In contrast, prediction platforms like Kalshi operate like stock exchanges that match buyers with sellers, and then collect transaction fees. Kalshi never absorbs the opposite side of a player’s bet.

“So Kentucky is actually taxing something closer to a brokerage commission than a gambling take,” Appleby said.

While that distinction might argue for federal control by the CFTC, Appleby said the states have longstanding interests in regulating gambling from the perspectives of consumer protection and public morality. Moreover, failing to regulate markets that behave like sports gambling creates a “competitive asymmetry” with platforms like DraftKings and FanDuel, he added.

Resolving the conflict between the states and federal government could take years and will likely require review by the US Supreme Court, said Laura D’Angelo, co-leader of the gaming industry practice at Jones Walker LLP in Lexington, Ky.

D’Angelo pointed to recent comments by CFTC Chairman Michael Selig, who expressed an expansive view of the commission’s regulatory authorities to include betting on sports, politics, and more, surprising many attorneys in the gaming industry. On the other side of the fence, D’Angelo said state attorneys general and gaming officials wouldn’t surrender quietly.

“Already we have seen the CFTC take some very aggressive positions,” she said. “So, you will have a couple different federal district courts take different positions. Once those go through the process and you see a split in the circuit courts, this will have to be taken up by the Supreme Court. This will take at least two years to unwind.”