Kalshi Challenges Illinois Sports Betting Tax as Prediction Market Jurisdiction Fight Escalates

The lawsuit, filed against Illinois Attorney General Kwame Raoul, Gov. J.B. Pritzker and other state officials, centers on a fundamental legal question that has become the defining issue in the nationwide prediction market debate: whether contracts traded on federally regulated exchanges such as Kalshi constitute sports bets subject to state gambling laws or federally regulated financial derivatives overseen exclusively by the Commodity Futures Trading Commission (CFTC).

The dispute arises from Illinois legislation that classifies prediction market operators as sports wagering businesses when they offer sports-related event contracts, according to Ars Technica. Beginning July 1, the law imposes a 1.75% tax on the first five million sports wagers conducted annually on prediction markets and a 3.5% tax on wagers above that threshold. Operators also would be required to obtain a state sports betting license costing $15 million for the first four years, followed by $1 million annually.

Kalshi argues those requirements are preempted by federal law because it operates as a CFTC-regulated exchange rather than a sportsbook. According to the complaint, Illinois is improperly treating federally authorized event contracts as conventional gambling activity, forcing the company to choose between complying with state law or federal requirements that it make its platform available nationwide on uniform terms.

At the center of the litigation is competing definitions of a sports bet, per Ars.

Related: Bill Introduced to Bar Insider Trading on Prediction Markets by Lawmakers

Kalshi maintains that its products are not wagers but financial instruments known as swaps, a type of event contract. The company argues these contracts function as risk management tools that allow market participants to hedge exposure to uncertain future events. Unlike a sportsbook, Kalshi says, traders do not wager against the platform itself. Instead, every position has a counterparty willing to assume the opposite side of the trade, making the exchange analogous to other derivatives markets regulated by the CFTC. The company cites potential commercial users such as media companies hedging television ratings, advertisers evaluating sponsorship value, and insurers managing risks tied to ticket revenue.

Illinois and numerous other states reject that distinction. State regulators argue that sports-related event contracts are economically indistinguishable from traditional sports wagers because participants stake money on the outcome of sporting events and either win or lose based on the result. In a letter previously signed by attorneys general from 40 states and the District of Columbia, including Illinois, state officials argued that any distinction between sportsbook wagers and prediction market contracts is “illusory” and that the CFTC lacks exclusive jurisdiction over sports gambling. They contend that sports event contracts do not serve the traditional hedging, price discovery or risk allocation purposes associated with derivatives markets.

The Illinois lawsuit represents the latest front in a broader conflict between federal and state regulators that has intensified over the past year. In April, the CFTC sued Illinois over the state’s efforts to regulate prediction markets, arguing that sports-related event contracts traded on federally designated exchanges are lawful swaps under the Commodity Exchange Act rather than illegal gambling.

That jurisdictional dispute has produced inconsistent court rulings across multiple states. Illinois itself has acknowledged in court filings that the issue is being litigated nationwide with mixed results, according to Ars.

The stakes extend well beyond sports trading. The CFTC has warned that if states prevail in regulating sports event contracts as gambling, they could seek similar authority over prediction contracts involving elections and other political events, an area already attracting heightened scrutiny following concerns about insider trading and lawmakers’ participation in political prediction markets. Meanwhile, the commission recently proposed new rules clarifying how it would exercise its regulatory authority over prediction markets, underscoring the federal government’s determination to preserve its oversight role even as states continue pressing for greater control.