A group of businesses including Kalshi, Crypto.com and Polymarket has taken legal action against Kentucky’s unprecedented excise tax targeting prediction market platforms, filing suit on Friday.
Kentucky lawmakers passed legislation in April establishing a 14.25% tax on transaction fees collected by prediction market operators, marking the first such state-level tax in the nation. The legal challenge contends this levy violates constitutional principles, discriminates against their industry, and conflicts with federal regulations.
These platforms allow users to purchase, sell or exchange contracts tied to real-world outcomes — derivatives that enable wagering on whether specific events like electoral contests or economic data will occur.
The Coalition for Fair Markets, which brought the state court case, argues the tax rate exceeds what Kentucky imposes on its “favored incumbent industry,” pointing to the 9.75% rate applied to horse track betting.
Kentucky Attorney General Russell Coleman responded with a statement filled with gambling references, promising to contest the lawsuit. “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,” he said. “In any courtroom, the attorneys with the AG’s Office are the odds-on favorite to win.”
According to the lawsuit, the tax creates barriers that discourage prediction market operations within Kentucky’s borders.
“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 filing states.
Kalshi issued a statement arguing that imposing taxes on federally supervised markets “just pushes people toward illegal platforms with no oversight and no protections.” The company added: “Kalshi is an American company, regulated here at home, and we’re joining the fight for Kentuckians’ access to safe, legal markets.”
The prediction market industry has been working aggressively to establish credibility with both the public and lawmakers as legitimate venues for wagering on topics ranging from athletic competitions to weather patterns to international affairs.
However, several cases have emerged where individuals exploited insider knowledge for profits on these platforms. Recent revelations showed that former former Congressman George Santos faced investigation for allegedly placing illegal wagers on his own attendance at President Donald Trump’s State of the Union address after initially committing to appear. Additionally, in April, military authorities charged a U.S. Army soldier with leveraging classified intelligence to earn $400,000 through Polymarket trades related to the timing of American military actions in Venezuela this year.
