A coalition of operators, including Kalshi, Polymarket, and Crypto.com submitted a lawsuit targeting Kentucky’s trailblazing excise tax on prediction markets.
The 14.25% charge, added by the Kentucky General Assembly in April, will be applied to operators’ transaction fees once it goes into effect on Jan. 1, 2027. The lawsuit challenges the legality of that, saying that state officials are preempted by federal law.
What does the lawsuit entail?
The lawsuit was filed by the Coalition for Fair Markets, a trade group that represents prediction platforms, in Franklin Circuit Court.
In addition to referencing the limitation of state power relative to federal law, the lawsuit said the tax was “discriminatory.” That was based on the new tax being higher than it is for Kentucky’s “favored incumbent industry,” citing a 9.75% tax on sports wagers placed at horse racing tracks.
Although the legal process is only just beginning, Kentucky Attorney General Russell Coleman (R) said that he would defend the tax and his state from companies that aimed to “cancel Kentucky’s sports betting laws.”
That statement alone contradicts the sentiments of prediction operators, who claim their event contracts are distinctly different from sports betting services offered by state-licensed sportsbooks.
“In any courtroom, the attorneys with the AG's Office are the odds-on favorite to win,” Coleman said. “Together with the policymakers in the General Assembly and the regulators at the Kentucky Horse Racing and Gaming Commission, we are well-positioned to protect this Commonwealth, just like we've been doing for over a century.”
Taxing prediction markets
Kentucky’s legislature approved the prediction market tax with House Bill 757 earlier this year.
The tax was included in a 380-page document that also banned the sale of a controversial herbal supplement, prevented school district boards from issuing a new tax, created a study on banks, and contained a slew of unrelated mandates.
Sen. Chris McDaniel (R-Ryland Heights), the chair of the Senate Appropriations and Revenue Committee, said in April that officials wanted to tax prediction operators, not markets themselves. Placing an excise tax on transaction fees implemented by companies is different from taxing their revenue or requiring them to pay to receive an operator’s license.
Kentucky’s approach is also different from that taken by Illinois, which became the first state to enact a tax on prediction markets when Gov. JB Pritzker signed a $56 billion budget plan on Tuesday. Once the budget goes into effect, Illinois will charge prediction operators 1.75% per transaction on their first five million trades, and 3.5% on every subsequent transaction.
Ongoing legal squabbles
Licensed prediction platforms are federally regulated by the Commodity Futures Trading Commission. They’ve also received the support of President Donald Trump, who said that it was “critically important” that the CFTC retained full control of its regulation.
States have mounted multiple legal challenges in the past. Sending cease-and-desist orders and seeking temporary injunctions against operators often resulted in legal losses, especially once the CFTC got more involved.
Despite that, states have become emboldened in their fights against prediction operators. Minnesota issued an outright ban on these platforms earlier this year, while both Illinois and Kentucky are or plan to tax operators.
The Trade Handle Prediction Markets Take
The Coalition for Fair Markets may have a case with the discriminatory aspect of the tax, given that it is higher than what is charged at horse racing tracks. However, it may have a tough time getting rid of the tax entirely, since it is not a direct tax on companies’ profits, but rather, their transactions inside state lines.