States' $600 Million Tax Fight With Kalshi Heads to Supreme Court

States have lost more than $600 million in tax revenue to unregulated prediction markets, the American Gaming Association estimates, as a federal-state fight over Kalshi's sports contracts heads toward the Supreme Court.

"The CFTC's recent actions represent a significant departure from historic federal policy," said Dan Wallach, founder of the country's first sports-betting law firm.

Kalshi, registered with the Commodity Futures Trading Commission as a designated contract market, took in nearly $1.9 billion in college basketball wagers in February alone, ESPN reported, while regulated sportsbooks expect more than $3 billion on the NCAA tournaments. New York sued Kalshi in July, accusing it of skirting the state's 51 percent sports betting tax, and the CFTC has sued New York and eight other states to assert exclusive authority.

The outcome carries existential implications for Kalshi, whose sports contracts make up about 85 percent of its roughly $4 billion in annual volume. If states prevail, the platform faces 50 different gambling regimes; if the CFTC wins, state-licensed sportsbooks lose ground to a federally regulated rival.

The dispute turns on whether Kalshi's event contracts are financial derivatives or gambling. Kalshi argues it operates a federally regulated exchange under the Commodity Exchange Act, which grants the CFTC exclusive jurisdiction over designated contract markets. States counter that the platform is an unlicensed sportsbook exploiting a legal technicality to dodge gaming taxes and oversight.

Third Circuit Backs Kalshi, Sixth Circuit Skeptical

The CFTC under Chair Michael Selig has sided with the platforms, filing civil complaints against states and intervening in private litigation. In May, President Donald Trump wrote on Truth Social that it is "critically important" the CFTC's exclusive authority over prediction markets be maintained. Trump's son, Donald Trump Jr., advises both Kalshi and Polymarket, where his venture capital firm is a major investor.

Courts have split. The Third Circuit ruled in Kalshi's favor in April, holding its sports contracts likely constitute swaps governed by the CFTC. The Sixth Circuit heard oral argument in late July on Kalshi's appeal of an Ohio ruling against it, with one judge pressing the company on why uniform federal regulation beats state oversight. Similar fights are pending in the Fourth and Ninth circuits.

The last time the CFTC faced a comparable jurisdictional question was under the Biden administration, when it blocked election contracts over insider-trading concerns before a court forced it to allow them. That reversal opened the door to sports contracts in late 2024, and Kalshi's volume has since ballooned from $1.3 billion in estimated annualized sports revenue to roughly $4 billion.

States Diverged From Bans to Taxes

State responses have diverged. Hawaii's House passed a bill expanding the definition of gambling to cover prediction markets, while Kentucky's House approved a 17.25 percent tax on transaction fees. Eleven states have issued cease-and-desist letters or filed enforcement actions, and Nevada's gaming board ordered Kalshi to stop operating in the state by Aug. 12 or face $120,000-a-day fines.

The CFTC issued an advanced notice of proposed rulemaking in March, seeking comment on which event contracts may be prohibited as contrary to the public interest, with responses due April 30. Congress has weighed in with the bipartisan Prediction Markets Are Gambling Act, which would reclassify sports and casino-style contracts as gambling outside the CFTC's jurisdiction.

With billions in revenue at stake for both operators and state treasuries, and federal courts reaching conflicting conclusions, the only safe prediction is that the fight continues until the Supreme Court or Congress settles the jurisdictional question.

This article is for informational purposes only and does not constitute investment advice.