Kalshi-Led Coalition Sues Kentucky Over 14.25% Prediction Market Tax, Calling It Discriminatory and Unconstitutional

A coalition of prediction market operators has filed suit against Kentucky in state court, challenging a newly enacted 14.25% excise tax on prediction market transactions that they argue is discriminatory, unconstitutional, and in direct conflict with federal law. The lawsuit, brought by the Coalition for Fair Markets and including platforms Kalshi, Crypto.com, and Polymarket, marks the latest flashpoint in the growing legal and regulatory battle over how states can treat federally regulated prediction markets.

The Kentucky General Assembly approved the tax in April, making it the first state-specific excise tax ever imposed on transactions conducted through federally designated derivatives exchanges. The Coalition for Fair Markets argues that no other state has attempted such a targeted levy on federally regulated derivative transactions, making Kentucky’s law a significant and legally vulnerable departure from the status quo.

The Tax and Why Operators Say It’s Unfair

At the core of the legal challenge is an argument rooted in unequal treatment. The coalition notes that wagers placed at Kentucky’s horse racing tracks are subject to a 9.75% tax rate — substantially lower than the 14.25% tax imposed on prediction market operators. The lawsuit characterizes this disparity as proof that the Kentucky law is designed to discriminate against prediction markets in favor of the state’s influential horse racing industry, which has deep historical and political roots in Kentucky.

“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 states.

Kalshi, which operates as a federally regulated derivatives exchange under oversight from the Commodity Futures Trading Commission, argued that the tax would have unintended consequences beyond the financial burden it imposes on operators. The company warned that taxing legal platforms more heavily than informal alternatives would push users away from regulated, transparent markets and toward illegal or offshore platforms that operate without consumer protections.

“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.”

Kentucky AG Vows to Defend the Law

Kentucky Attorney General Russell Coleman responded to the challenge with a combative statement, pledging to defend the tax in court. Coleman positioned the lawsuit as an effort by out-of-state companies to override Kentucky’s authority to regulate and tax businesses operating in the state.

“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 any courtroom, the attorneys with the AG’s Office are the odds-on favorite to win.”

The legal challenge will likely center on whether federal law — specifically the Commodity Exchange Act, which gives the CFTC jurisdiction over designated contract markets like Kalshi — preempts Kentucky’s ability to impose state-specific excise taxes on CFTC-regulated transactions. Courts have generally interpreted federal preemption broadly when it comes to derivatives trading, giving the coalition at least a credible legal argument to make.

A Broader Pattern of State Resistance

The Kentucky lawsuit is the latest chapter in an ongoing battle between prediction market operators and state regulators who view event contract trading as encroaching on territory traditionally regulated by states as sports betting. Several states — including Ohio, New Mexico, and Wisconsin — have taken various legal and regulatory actions in recent months to push back against prediction market platforms operating in their jurisdictions without state gambling licenses.

The CFTC has so far sided with prediction market operators on the fundamental question of federal jurisdiction, but states have argued they retain authority to regulate consumer protection, tax revenue, and gambling integrity within their borders. The Kentucky case will add another data point to this emerging body of law.

For bettors looking to participate in legally regulated prediction markets, platforms like Kalshi continue to operate in states where their legality has not been challenged. The Kalshi Promo Code page outlines current offers for new users, while the Crypto.com Prediction Markets Promo Code provides details on that platform’s sign-up incentives. Sports bettors in states with licensed sportsbooks can also find competitive offers through the DraftKings Promo Code page.

The outcome of the Kentucky case could set a significant precedent for how states across the country approach prediction market taxation and regulation in the years ahead.