Kalshi, Crypto.com, and Polymarket Sue Kentucky Over Sports Prediction Market Tax They Call Discriminatory

Three of the largest prediction market platforms in the United States have filed a state court lawsuit against Kentucky over a newly enacted excise tax that they say discriminates against federally regulated prediction markets while favoring the state’s horse racing industry. Kalshi, Crypto.com, and Polymarket, operating through the Coalition for Fair Markets, are challenging a 14.25% tax on prediction market operator transaction fees that was passed by the Kentucky General Assembly in April — the first such state-specific levy ever applied to transactions on a federally regulated derivatives exchange.

The lawsuit argues that the tax is unconstitutional, preempted by federal law, and deliberately constructed to disadvantage prediction markets in a state where horse racing carries enormous political weight. The disparity at the center of the legal challenge is straightforward: wagers placed at Kentucky horse tracks are taxed at 9.75%, while prediction market operators face a rate that is nearly 4.5 percentage points higher under the new law.

Why Prediction Market Operators Say This Is Unconstitutional

Kalshi operates as a CFTC-registered designated contract market — a federally regulated exchange — which gives it a fundamentally different legal status from traditional sports betting operators. The coalition’s lawsuit argues that states cannot impose targeted excise taxes on transactions conducted through CFTC-regulated exchanges without running into federal preemption under the Commodity Exchange Act, which governs CFTC-licensed platforms like Kalshi.

The operators also contend that no other state in the country has imposed a state-specific excise tax of any kind on derivatives transactions executed through a federally designated exchange. Kentucky’s law, they argue, creates a legal framework that exists nowhere else and that was designed specifically to create a financial barrier for prediction markets competing with the state’s politically powerful horse racing and traditional gambling industries.

Kalshi warned that the financial pressure created by the tax could have the unintended effect of pushing users away from regulated, transparent platforms and toward offshore or illegal alternatives that operate without consumer safeguards. “Taxing federally regulated markets just pushes people toward illegal platforms with no oversight and no protections,” the company said.

Kentucky AG Plans a Fight

Kentucky Attorney General Russell Coleman responded immediately, pledging to defend the tax in court and framing the lawsuit as an attempt by out-of-state companies to override state authority. Coleman argued that the state has every right to tax and regulate businesses operating within its borders and signaled the AG’s office would mount an aggressive legal defense.

The case adds Kentucky to a growing list of states actively pushing back against prediction market platforms on various legal fronts. In recent months, Ohio, New Mexico, and Wisconsin have all taken steps to challenge or restrict prediction market activity within their borders, arguing that event contract trading on sports outcomes falls within state jurisdiction over gambling rather than federal oversight of derivatives exchanges.

For sports bettors in Kentucky, the current landscape of legal Kentucky Sportsbooks remains fully operational and separate from the prediction market dispute. Licensed sportsbooks including those accessible through the DraftKings Promo Code and BetMGM Promo Code continue to accept wagers under the state’s existing sports betting regulatory framework, which is not affected by the prediction market tax litigation.

A Legal Fight With National Implications

The outcome of the Kentucky case could help define the outer limits of state authority over federally regulated prediction markets, a question that courts and regulators across the country are only beginning to wrestle with seriously. A ruling in the coalition’s favor could limit states’ ability to impose targeted taxes or restrictions on CFTC-regulated platforms. A ruling for Kentucky could open the door to similar levies in other states that have been skeptical of prediction markets.

Either way, the lawsuit represents a significant escalation in what has become one of the most contested regulatory battlegrounds in U.S. sports and gambling law. The prediction market industry has grown rapidly over the past two years, driven in part by the World Cup and other major sporting events that have generated significant trading volume on platforms like Kalshi and Polymarket, and the legal framework governing that growth is still very much being written.