Kentucky’s new prediction markets tax faces legal challenge from Kalshi-led coalition

A coalition of prediction market operators, including Kalshi, Crypto.com and Polymarket, has sued Kentucky over a newly enacted tax on prediction market transactions, arguing that the levy is discriminatory and conflicts with federal law.

The lawsuit, filed in Kentucky state court by the Coalition for Fair Markets, challenges a 14.25% excise tax on prediction market operators’ transaction fees that was approved by the Kentucky General Assembly in April.

Prediction markets allow users to buy, sell, and trade event contracts tied to the outcomes of real-world events, ranging from elections and economic indicators to sports and weather forecasts.

The plaintiffs contend that Kentucky’s measure is the first state-specific excise tax imposed on transactions conducted through federally regulated derivatives exchanges and unfairly targets the industry compared with the state’s horse racing sector.

According to the lawsuit, wagers placed at Kentucky horse tracks are subject to a 9.75% tax rate, lower than the 14.25% levy imposed on prediction market operators.

“No State currently levies a State-specific excise tax of any kind on derivatives transactions that take place on a federally designated exchange, let alone the sort of specifically targeted and discriminatory tax that Kentucky has imposed here,” the lawsuit said.

The coalition argues that the tax is unconstitutional, preempted by federal law, and discourages prediction market companies from operating in Kentucky.

Kentucky Attorney General Russell Coleman pledged to defend the law against the challenge.

“You can bet our Office will defend these statutes and the people of our Commonwealth from out-of-state companies that seek to cancel Kentucky’s sports betting laws,” Coleman said in a statement. “In any courtroom, the attorneys with the AG’s Office are the odds-on favorite to win,” he added.

Kalshi said the tax could have unintended consequences by pushing users away from regulated platforms.

Taxing federally regulated markets “just pushes people toward illegal platforms with no oversight and no protections,” Kalshi said in a statement.

“Kalshi is an American company, regulated here at home, and we’re joining the fight for Kentuckians’ access to safe, legal markets,” it added.

The lawsuit comes as prediction market operators seek broader acceptance among regulators and policymakers, positioning their platforms as legitimate venues for trading contracts linked to future events.

The sector has also faced scrutiny over allegations that some users profited from non-public information. Former U.S. Congressman George Santos was recently reported to be under investigation for allegedly placing trades related to President Donald Trump’s State of the Union address, while a U.S. Army soldier was charged in April with using classified information to earn about $400,000 trading on Polymarket tied to the timing of U.S. military operations in Venezuela.

The case marks the latest legal and regulatory battle involving prediction markets as states and federal authorities continue to debate how the rapidly growing industry should be taxed and regulated.