Kentucky Set to Tax Event Prediction Markets in First for States

Kentucky would become the first state in the country to tax prediction markets such as Kalshi and Polymarket under a broad tax bill headed to the desk of Gov. Andy Beshear (D).

The state also plans to implement a new excise tax on fantasy sports platforms. The proposed new levies were tucked into HB 757, an omnibus tax policy measure that cleared the Republican-controlled legislature late Wednesday, sending it to Beshear to sign or veto. Even if he rejects it, Republican lawmakers have generally been able to override previous vetoes by the second-term Democratic governor.

Prediction markets, which resemble other forms of wagering, allow players to trade contracts based on the outcome of real-world events including elections, political events, economic data, and sports games. Interest in such trading has exploded in the past two years, raising questions about market regulation and taxation at both the federal and state levels.

Kentucky’s proposed tax on prediction market transaction fees comes as the Trump administration headed to court to sue Arizona, Connecticut, and Illinois, objecting to their recent legal challenges to the markets under state gambling statutes. The federal government on Thursday asserted the states are violating the Commodity Futures Trading Commission’s exclusive authority to regulate the markets.

The Kentucky proposal would require the state to establish a loose regulatory framework for the markets, said Mark Sommer, a tax partner with FBT Gibbons LLP in Louisville, Ky.

“It is noteworthy that the legislation specifically states that it is not the intent to legalize prediction market transactions but only to tax those that operate in such space,” Sommer said. “Yet the legislation authorizes the Department of Revenue and the Kentucky Horse Racing and Gaming Corporation to advance regulations concerning the conduct or activity of prediction markets in the state.”

Kentucky would be the first state to impose such a tax, according to an analysis by the National Conference of State Legislatures. Iowa is getting close with SF 2470, which passed the state Senate Tuesday by a vote of 45-1. The bill is now being considered by the Iowa House.

Proposed Tax Rates

Kentucky lawmakers hammered out the omnibus tax bill under a House and Senate conference committee process Wednesday. The Senate unanimously passed the bill, and the House followed late in the day with a 65-25 vote of approval.

HB 757 would levy a tax on the operators of prediction markets at a rate of 17.25% of each platform’s transaction fees. The program would be expected to raise $2.1 million in 2028, according to a fiscal analysis.

A separate feature of the bill would impose a tax on fantasy sports platforms at a rate of 12% of entry fees.

The news and research platform Gambling Insider recently reported total prediction markets trading volume reached $44 billion in 2025. Nearly 90% of the trading was transacted on just two platforms, Kalshi and Polymarket.

In a statement, Kalshi warned Kentucky risks litigation from the federal government, because the state lacks clear authority to regulate prediction markets.

“Imposing a new tax on prediction market activity in Kentucky interferes with federal law and risks driving users outside U.S. regulatory oversight, eroding consumer protections, and making enforcement significantly more difficult,” Kalshi said. “It will have the opposite effect—users will go offshore, undermining the state to generate tax revenue. It’s clear Kentucky is closed for business.”

Other Tax Provisions

HB 757 makes several additional changes, including conformity to the Internal Revenue Code beginning on Jan. 1, 2026. Kentucky is a static conformity state, meaning it aligns its tax system to the federal code at a specific date in time.

While HB 757 would pull Kentucky into the reforms created under President Trump’s 2025 tax-and-spending law, state lawmakers chose to decouple from several of the primary federal tax cuts, including Section 163(j), relating to the deduction for interest paid by businesses, and Section 174A, permitting immediate deductions for domestic research and experimental expenditures. The bill also decouples from the federal deduction for qualified tips and overtime pay, and the new deduction on vehicle loan interest.

The bill would make two important changes to Kentucky’s sales and use tax code. One change would impose a sales and use tax on data brokering services. The second modification would remove the 200-transaction threshold triggering remote seller tax collection obligations.

Kentucky law currently states out-of-state sellers have economic presence in the state, or nexus, when they have more than $100,000 in gross revenue or conduct 200 or more transactions in the state during the year. The two thresholds reflect standards referenced by the US Supreme Court in its landmark 2018 Wayfair ruling, which opened the door to state taxation of out-of-state retailers.