The growing popularity among states to legalize sports gambling has led way to another growing phenomena, prediction markets. These markets—platforms where users trade on the outcome of future events—have transitioned from academic curiosities to a multi-billion dollar industry.
The concept of participating in prediction markets is simple: a user pays a sum of money to bet on the outcome of a future event. Examples may include betting on the outcome of an election, if the Federal Reserve will increase or decrease interest rates, or if the White Sox will win the AL Central Division this year.
Several states have already moved aggressively to regulate—and in some cases tax or ban—prediction markets. The landscape is fragmented, but three patterns dominate: (1) states treating prediction markets as gambling, (2) states imposing cease‑and‑desist orders to protect sports‑betting tax revenue, and (3) a few states exploring licensing or taxation frameworks.
The first case example that fits into the first category is the state of Hawaii. Earlier this year, their State Legislature decided to ban participating in prediction markets altogether under HB2198, due to the practice’s speculative nature and the fact that gambling is already banned in that state.
Eleven states have issued cease-and-desist orders against prediction‑market operators, arguing they function as unlicensed sports‑betting platforms and divert taxable revenue. In this approach, prediction markets have not technically been formally banned. Yet, some states are trying to figure out where they fit when it comes to how to regulation the new industry.
As for the third category, Kentucky’s legislative advanced and passed a law to tax and regulate the industry. Gambling has a long and robust history in the bluegrass state, being the center of horse racing.
Table 1 below provides a brief list of how some states have addressed taxing and regulating prediction markets.
| State | Policy Approach | Tax/Regulatory Status |
|---|---|---|
| New York | Restrictive | Strictly prohibits unauthorized betting on elections; aggressive Attorney General oversight. |
| New Jersey | Adaptive | Allows “Exchange Wagering” through specific licensing; taxed at 15-20% of gross revenue. |
| West Virginia | Progressive | Early mover in allowing political markets under sports wagering licenses (briefly paused in 2020). |
| Kentucky | Litigation-Heavy | Active legal battles regarding “gray market” machines and online prediction platforms. |
When it comes to the regulation and taxation of prediction markets, the state of Illinois has chosen to also take the third approach, primarily through broader gaming and revenue legislation designed to capture “exchange-based” wagering.
Illinois is now taxing prediction markets through two separate mechanisms, depending on whether the activity is treated as sports‑related prediction markets or general prediction market contracts. Both approaches are currently tied up in litigation, but the tax provisions themselves are clear.
Illinois amended its Sports Wagering Act to classify sports‑event prediction markets as a form of sports wagering. As a result, the state imposes a gross‑receipts tax on these markets:
- 15% tax on gross receipts from sports‑related prediction markets.
- This revenue flows into a new Sports Wagering Fund.
Platforms like Kalshi argue that these contracts are federally regulated derivatives, not state‑regulated sports bets, and are suing Illinois on supremacy‑clause grounds.
A second tax applies specifically to exchange‑style wagers on sporting events:
- 1.75% tax on the first 5 million trades per fiscal year
- 3.5% tax on all trades above that threshold
The CFTC has expanded its lawsuit against Illinois to challenge this tax, arguing that it effectively bans federally regulated prediction markets by imposing fees that exceed typical exchange transaction costs.
Separately from the budget‑related taxes above, Illinois lawmakers introduced the Prediction Markets Regulation and Taxation Act (SB4168), which has not yet been enacted but outlines an even more aggressive tax structure:
- Requires a $1,000,000 annual license for operators.
- Imposes a 50% privilege tax on adjusted gross receipts from qualifying prediction market contracts placed by Illinois residents.
This bill would treat prediction markets as a form of gambling and subject operators to criminal penalties for noncompliance.
Prairie State Policy 