Kalshi, Crypto.com and Polymarket US Sue to Block Kentucky Prediction Market Tax

A brand new business coalition that features Kalshi, Crypto.com and Polymarket US has sued Kentucky to block the state’s first-of-its-kind 14.25% tax on prediction market transaction charges, arguing the legislation unlawfully targets federally regulated occasion contract exchanges.

The lawsuit, filed in Kentucky’s Franklin Circuit Court by Coalition for Fair Markets, challenges Kentucky’s new tax and associated restrictions that bar state-licensed gaming operators from contracting with platforms that provide sports activities occasion contracts. The grievance says the coalition’s members are KalshiEX LLC, Crypto.com’s North American Derivatives Exchange Inc. and QCX LLC, Polymarket’s regulated U.S. trade.

Kalshi spokesperson Jacki McGavick shared an announcement from the corporate concerning the lawsuit.

“The individuals who get damage by this tax are Kentuckians,” Kalshi mentioned within the assertion. “Taxing federally regulated markets doesn’t make anybody safer, it simply pushes individuals towards unlawful platforms with no oversight and no protections. Kalshi is an American firm, regulated right here at dwelling, and we’re becoming a member of the combat for Kentuckians’ entry to secure, authorized markets.”

The case marks the prediction market business’s first direct authorized problem to Kentucky’s April tax package, which made the state the primary to enact a focused tax on prediction market transaction charges. Illinois later followed with its personal prediction market tax measure. 

The lawsuit additionally reveals the formation of a brand new Virginia-incorporated business affiliation that brings three rival CFTC-regulated prediction market operators underneath the identical authorized umbrella. McGavick mentioned the choice to sue by means of the brand new coalition got here down to authorized energy.

“My understanding as to why we sued as a Coalition is simply that it makes for a stronger case,” McGavick informed DeFi Rate.

Lawsuit says Kentucky focused federally regulated markets

The grievance argues Kentucky’s tax bundle isn’t an bizarre state tax on enterprise exercise, however a focused effort to penalize federally regulated occasion contract exchanges as a result of state lawmakers view prediction markets as a risk to Kentucky’s gaming business.

“Notwithstanding Congress’s categorical command, Kentucky just lately enacted laws that immediately targets and discriminates in opposition to federally regulated prediction markets,” the grievance says. It factors to legislative feedback describing prediction markets as a “risk to all gaming” and argues Kentucky’s tax scheme exhibits an intent “to privilege incumbent in-state business.”

The lawsuit challenges three Kentucky payments, HB 757, HB 904 and HB 869, that collectively created a 14.25% tax on prediction market transaction charges and new restrictions on state-licensed gaming operators doing enterprise with platforms that provide sports activities occasion contract buying and selling.

The coalition argues the state tried to costume regulation as taxation. The grievance says Kentucky can not “evade federal preemption by particularly concentrating on federally regulated conduct for disfavored tax therapy,” arguing the tax applies solely to federally regulated exchanges and is outlined by reference to federal occasion contract legislation.

The grievance additionally leans closely on the distinction between Kentucky’s 14.25% prediction market tax and the state’s 9.75% tax on wagers at horse tracks.

“By the Commonwealth’s reasoning, federally regulated prediction markets are akin to playing,” the grievance says. “Yet, right here, Kentucky’s tax units a better fee on prediction markets than for the Commonwealth’s favored incumbent business.”

The lawsuit argues the tax reaches past Kentucky as a result of it applies to Kentucky residents who commerce occasion contracts even whereas exterior the state. The grievance says the legislation “impermissibly tasks Kentucky’s taxing authority past its borders and into each different State during which a Kentucky resident would possibly commerce.”

The coalition additionally argues Kentucky singled out prediction market operators with out a legitimate foundation underneath the state structure. The grievance says HB 757 “doesn’t apply to all monetary transaction platforms” and that “Kentucky’s incumbent industries don’t bear an equal burden.” It provides that the tax applies “solely to the disfavored class of prediction market operators.”

New coalition brings rivals underneath one banner

The lawsuit additionally introduced a beforehand low-profile prediction market business affiliation into public view.

Coalition for Fair Markets was shaped in April 2026, McGavick mentioned. Its goal is to “advance the rights of contributors in info and prediction markets,” and it “advocates for the authorized recognition of prediction market exercise as protected expression and lawful commerce, and works to get rid of regulatory limitations that suppress participation in these markets, distort value indicators, or criminalize the formation and communication of probabilistic opinion.”

The Polymarket US membership is notable as a result of Polymarket was not a part of the Coalition for Prediction Markets, the separate Washington trade group launched in December by Kalshi and Crypto.com with Robinhood, Coinbase and Underdog. That group was shaped to protect entry to federally supervised prediction markets as state regulators and gaming stakeholders push again in opposition to sports activities occasion contracts.

Polymarket and Kalshi are additionally broadly considered as one another’s greatest rivals. That rivalry spilled into public view this month, when Sportico reported on a Kalshi letter to the CFTC criticizing exercise on Polymarket’s offshore platform, and the New York Post reported that Polymarket accused Kalshi of spying on its enterprise and copying its concepts.

What comes subsequent

The coalition is in search of declaratory and injunctive aid blocking Kentucky from imposing the challenged legal guidelines. Its claims transcend federal preemption, additionally invoking the dormant Commerce Clause, which usually prohibits states from unduly burdening interstate commerce, in addition to the First Amendment, Kentucky’s equal safety ensures and the state structure’s ban on special legislation that singles out explicit teams for distinctive authorized therapy.

The timeline provides the case some urgency. Kentucky’s restrictions on state-licensed gaming operators doing enterprise with sports activities occasion contract platforms are scheduled to take impact July 15, whereas the 14.25% prediction market tax is scheduled to take impact Jan. 1, 2027.

Other states have sought to limit prediction markets by means of cease-and-desist letters, enforcement actions and outright bans on sure occasion contracts. The Commodity Futures Trading Commission has sued a number of states in response, arguing these efforts intrude with its unique jurisdiction over federally regulated derivatives markets. 

The Kentucky case opens a distinct entrance by testing whether or not states can single out prediction market transaction charges for focused taxation, even when they often retain authority to tax companies working inside their borders.

The grievance argues Kentucky’s method is unprecedented, saying “no State presently levies a State-specific excise tax of any variety on derivatives transactions that happen on a federally designated trade.”

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