Illinois and Kentucky enact prediction market taxes; Kalshi sues Illinois
Illinois and Kentucky enacted gambling legislation effective July 1 that imposes new taxes on prediction markets alongside expanded daily fantasy sports rules. Kalshi filed suit against Illinois, challenging the state's authority to tax its CFTC-regulated event contracts. Kentucky's parallel tax takes effect simultaneously. The measures extend a state-by-state revenue model that North Carolina pioneered weeks earlier.
Kalshi's Illinois lawsuit is the first direct court test of whether CFTC registration blocks state taxation. A federal ruling for the state would invite copycat statutes nationwide; a win for Kalshi would embolden challenges against North Carolina's identical 6% levy. Both platforms now face a triple squeeze: taxes that narrow their margin advantage over offshore competitors, legal fees across multiple state fights, and the risk that each new state law chips away at preemption without technically regulating.
Polymarket is exposed to the same Illinois and Kentucky statutes. The January 2027 North Carolina effective date and Illinois's July 1 enforcement create overlapping deadlines that strain legal budgets. Operators must decide whether to absorb costs, pass them to traders, or bet on a federal shield that has never been tested for tax preemption.
Illinois and Kentucky join North Carolina's 6% prediction market tax as the second and third states to impose dedicated levies on CFTC-registered event-contract platforms this year, testing whether federal preemption shields operators from state revenue grabs.