Kentucky Passes First Law Taxing Prediction Markets — Other States Are Watching

Kentucky has become the first state in the country to explicitly tax prediction market platforms, and the move is already sending ripples across the country. While Iowa is advancing its own bill and Illinois has introduced legislation with a drastically steeper tax structure, the federal government is simultaneously suing several states over whether they even have the authority to regulate this space at all. For bettors and traders, the patchwork that is emerging means the rules of the game may soon look very different depending on where you live.

What Kentucky Actually Did

The Kentucky legislature passed two related measures that together reshape how prediction markets operate in the state. The first, House Bill 757, creates a new excise tax on prediction market operators at a rate of 14.25 percent of transaction fees. That rate matches what Kentucky already charges mobile sportsbooks, though it is applied differently, touching the fees platforms earn on individual contracts rather than adjusted gross revenue after payouts. The bill cleared the Republican-controlled legislature with overwhelming margins and was sent to Democratic Governor Andy Beshear during the first week of April. Even if Beshear vetoes it, the legislature has routinely overridden his previous vetoes.

The second measure, House Bill 904, takes a different approach. Rather than taxing prediction markets outright, it prohibits any licensed horse racing operator, sportsbook, or fantasy sports provider in Kentucky from participating in or contracting with prediction market platforms that operate within the state. The original version of the bill would have barred those operators from dealing with prediction market platforms anywhere in the country, which would have forced companies like DraftKings, FanDuel, and Fanatics to choose between keeping their Kentucky sports betting licenses or continuing to offer prediction market products in other markets. The three companies testified against that language, and lawmakers narrowed the restriction to activity specifically within Kentucky before final passage.

Kentucky lawmakers were also careful to include language clarifying that the tax does not constitute legalization of prediction market activity. The bill states explicitly that it is not the intent of the legislature to legalize these transactions but only to tax operators who conduct them.

Iowa: A Full Licensing Framework

Iowa has moved further than any other state in attempting to build a complete regulatory structure around prediction markets. Senate File 2470 passed the Iowa Senate on March 31 by a 45-1 vote and moved to the House, where the legislative session was set to conclude shortly after. The bill would impose a 20 percent tax on adjusted revenues from event contracts, defined as total charges and fees collected minus payouts, along with a separate 20 percent excise tax on each individual contract purchase. The combined tax burden on operators and, potentially, their users would be substantially higher than Kentucky’s approach.

Beyond taxation, Iowa’s bill would require platforms to obtain a state permit to operate. The permit carries a 20 million dollar initial fee and a 100,000 dollar annual renewal cost, alongside requirements to verify user eligibility, restrict participation to individuals 21 and older, and implement responsible gaming measures. Under that framework, prediction markets would effectively be prohibited in Iowa unless operators are licensed and in compliance. It is the most ambitious attempt yet by any state to bring prediction markets under a formal regulatory umbrella similar to what exists for sports betting.

Illinois: 50 Percent and a Legal Battle Already Underway

Illinois has proposed the most aggressive tax structure of any state. Senate Bill 4168, introduced in March and still sitting in committee, would impose a 50 percent privilege tax on adjusted gross receipts from prediction market contracts involving Illinois users and require platforms to obtain a license from the Illinois Gaming Board. The initial license fee would be 1 million dollars with a 1 million dollar annual renewal.

That legislation has a significant complication: the federal government has already sued Illinois over its attempt to regulate prediction markets. On April 2, the Commodity Futures Trading Commission and the U.S. Department of Justice filed lawsuits against Illinois, Arizona, and Connecticut, targeting state enforcement actions that sought to restrict federally regulated prediction market platforms. The CFTC’s argument is that event contracts fall under its exclusive jurisdiction under federal law, and states cannot impose their own licensing frameworks on top of that. The Illinois Gaming Board had previously issued cease-and-desist letters to prediction market operators, calling their sports contracts unlicensed sports wagering. That is exactly the kind of state action the CFTC is challenging.

What This Means for Bettors

For the casual bettor, the immediate impact of Kentucky’s tax law is likely to be minimal. The 14.25 percent tax is imposed on operators, not users directly, though platforms can and sometimes do pass higher costs along through pricing or fees. The more significant question is whether the combined pressure from state taxation and the looming jockey position dispute between state and federal authority will eventually force prediction market platforms to make harder choices about where they operate and how they price their contracts.

The Iowa bill, if it passes the House and is signed into law, would be the most consequential state-level action yet. A 20 million dollar licensing fee is a significant barrier to entry that would limit the field to well-capitalized operators. The additional per-contract tax could meaningfully affect how platforms price their offerings in Iowa specifically, potentially creating a different user experience compared to states where no such rules exist.

The broader picture is one of genuine legal uncertainty. Courts have not yet tested whether state taxation of prediction market activity is different from state regulation of it, and the CFTC’s lawsuits create a direct conflict between federal authority and state action. Until that question is resolved, bettors in every state are operating in an environment where the rules could change based on decisions made in courtrooms rather than legislatures.