The prediction market behemoth Kalshi filed suit this week to block a new Illinois tax on financial exchanges like theirs that state gambling regulators have decried as illegal sports betting.
Kalshi’s federal lawsuit, filed in Chicago, seeks an injunction against the transaction taxes ranging from 1.75% to 3.5% that state lawmakers voted to slap on every “exchange wager” beginning next month on the prediction markets that have exploded in popularity over the past few years.
But Kalshi — and the Trump administration’s Commodity Futures Trading Commission — maintain that the “event contracts” traded on their markets don’t constitute gambling and can only be regulated by the federal government.
The CFTC asserted its position as the sole arbiter on prediction market regulation earlier this year when it sued to block state-level regulation efforts in Illinois as well as Arizona and Connecticut. New Jersey is also among the states grappling with how to handle the booming world of prediction markets.
Illinois Gaming Board administrator Marcus Fruchter issued cease-and-desist letters in April to Kalshi and its top competitors — Polymarket, Crypto.com and Robinhood — for engaging in “illegal gambling in violation of Illinois law.”
Prediction markets allow customers to buy “yes” or “no” contracts on the outcomes of myriad events, on everything from whether a baseball team will win a game to whether a politician will win their election.
While nearly indistinguishable from traditional sportsbooks on a practical level to the average consumer, it’s not considered betting because users are trading against each other and there’s no “house” profiting off the consumer’s loss.
It’s also led to numerous allegations of insider trading since the platforms can incentivize people to profit off inside knowledge. One anonymous trader made more than $400,000 earlier this year after placing a series of well-timed bets on the removal of Venezuelan President Nicolás Maduro.
Gov. JB Pritzker signed an executive order barring state employees from using insider information to bet on prediction markets.
Companies like Kalshi make money by charging transaction fees when users buy contracts. Illinois’ law would take a 1.75% state cut of each transaction, doubling the tax rate to 3.5% after a company’s first five million “event wagers.”
In their suit, Kalshi argues that violates the Supremacy Clause of the U.S. Constitution by encroaching on federal law.
“Kalshi is fundamentally different from state-regulated sportsbooks and casinos,” said Jacki McGavick, a spokesperson for Kalshi. “Courts have already recognized our status as a federally regulated exchange. Illinois is wasting its time and taxpayers’ dollars.”
Anticipating a legal fight, Illinois lawmakers did not bank on tax revenue from the new prediction market levy in the state budget approved in Springfield last month, and signed by Pritzker last week. The budget takes effect next month.
Other controversial new taxes on big social media companies and cryptocurrency exchanges could face legal fights, too.
“Prediction companies are seeking to use the courts to avoid complying with the same rules and consumer protections that apply to other wagering operators in Illinois,” a Pritzker spokesperson said in a statement. “The state of Illinois will continue defending Illinois’ authority to regulate these activities and protect consumers.”