A group of prediction market operators, including Kalshi, Crypto.com, and Polymarket, has filed a lawsuit against Kentucky after the state introduced a tax on prediction market transactions, claiming that this tax is discriminatory and in violation of federal law.
The lawsuit, lodged in Kentucky state court by the Coalition for Fair Markets, contests a 14.25% excise tax on transaction fees imposed on prediction market operators, which was passed by the Kentucky General Assembly in April.
Prediction markets enable users to buy, sell, and trade contracts based on the outcomes of real-world events, including elections, economic indicators, sports, and weather forecasts.
The plaintiffs argue that Kentucky’s excise tax is the first of its kind specifically targeting transactions on federally regulated derivatives exchanges, and unfairly discriminates against the prediction market sector in comparison to the state’s horse racing industry.
The lawsuit highlights that wagers at Kentucky horse racing venues incur a tax rate of 9.75%, which is notably lower than the 14.25% tax on prediction market operators.
“No state currently imposes a unique excise tax on derivatives transactions occurring on federally recognized exchanges, let alone such a specifically targeted and discriminatory tax as the one introduced by Kentucky,” the lawsuit stated.
The coalition contends that the tax is unconstitutional, preempted by federal regulations, and serves as a deterrent for prediction market companies considering operations in Kentucky.
Kentucky Attorney General Russell Coleman has vowed to defend the legality of the tax against this challenge.
“Rest assured, our office will uphold these regulations to protect the people of our Commonwealth from out-of-state companies that aim to undermine Kentucky’s sports betting statutes,” Coleman said in a statement. “In any courtroom, our attorneys are the favorites to prevail,” he remarked.
Kalshi has indicated that this tax might have unintended repercussions by driving users to unregulated platforms.
“Taxing federally governed markets only channels individuals towards illegal venues lacking oversight and protections,” Kalshi remarked in a statement.
“Kalshi is a U.S. company, regulated domestically, and we are committed to advocating for Kentucky residents’ access to secure, legal markets,” the statement added.
The lawsuit emerges as prediction market operators aim for wider acceptance by regulators and policymakers, positioning their platforms as legitimate venues for trading contracts linked to future events.
The industry has also been under scrutiny due to allegations that some users profited from insider information. Former U.S. Congressman George Santos has recently come under investigation for allegedly placing trades tied to President Donald Trump’s State of the Union address, while a U.S. Army soldier was charged in April with utilizing classified information to amass approximately $400,000 in trades on Polymarket linked to U.S. military operations in Venezuela.
This case represents the latest legal and regulatory challenge facing prediction markets as state and federal authorities debate how to appropriately tax and regulate the swiftly evolving industry.