Kalshi, Polymarket, and Crypto.com have formed the Fair Markets Alliance and filed suit in Kentucky court on June 13, targeting the state’s 14.25% tax on prediction market transactions. The coalition argues the levy is discriminatory, unconstitutional, and preempted by federal law.
Tax gap with horse racing sits at the center of the case
The lawsuit focuses on the difference between how Kentucky taxes prediction markets and how it treats established wagering businesses. According to the source material, Kentucky lawmakers passed legislation in April imposing a 14.25% excise tax on transaction fees collected by prediction market operators. Traditional horse racing wagers in the state face a tax rate of only 9.75%, a gap of nearly 46%.
In the complaint, the alliance says Kentucky is shielding a favored incumbent industry while applying different rules to a newer market category. The filing also says no other state imposes a targeted state-level excise tax on derivatives trading conducted on federally designated exchanges, and points to Kentucky’s measure as unusually specific and discriminatory.
Kalshi says the policy could push users off regulated venues
Kalshi said in a public statement that adding taxes to federally regulated markets would drive users toward illegal platforms with no oversight and no protections. The company described itself as a regulated American business and said it joined the case to defend the right of Kentucky residents to access legal and supervised markets.
The alliance’s position is that the tax would weaken operators’ willingness to do business in Kentucky. In its view, the measure would act as a barrier to the growth of federally regulated prediction markets inside the state.
Kentucky attorney general vows to defend the law
Kentucky Attorney General Russell Coleman answered with a sharp public response. He said his office would defend the state’s rules against what he described as out-of-state companies trying to undo Kentucky’s sports betting framework, and signaled that the state is prepared to fight the case in court.
Insider trading concerns add pressure to the industry
The legal fight is unfolding while prediction markets face rising scrutiny over information asymmetry and alleged misuse of nonpublic information. The source notes that former U.S. Representative George Santos is under investigation over alleged illegal betting on a prediction market tied to whether he would attend President Trump’s State of the Union address.
In a separate case from April, a U.S. Army soldier was charged with using classified intelligence to place bets on Polymarket related to the timing of potential U.S. military action in Venezuela, with alleged profits reaching $400,000. Those incidents have sharpened arguments from regulators who want tighter controls at the state level.
Federal oversight and state taxing power now collide
Kalshi and Polymarket have long argued that their businesses operate under the oversight of the U.S. Commodity Futures Trading Commission, giving them federal legal standing. This case opens a new front: whether states can impose their own targeted taxes outside that federal structure.
The court’s decision could reach beyond Kentucky. A loss for the state may limit similar efforts elsewhere, while a win could expose prediction market platforms to higher compliance costs and a more fragmented state-by-state regulatory environment.