Kalshi Prediction Market
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Monthly trading volume on prediction markets has exploded from less than $5 billion in September 2025 to about $24 billion in April 2026, according to the Pew Research Center. This nearly fivefold increase compares favorably with legalized U.S. sports betting, which only averages around $14 billion a month. But the boom is creating tension: prediction markets fall under the umbrella of the Commodity Futures Trading Commission, which has taken a hands-off approach to regulation even as the industry’s popularity has soared. Kalshi alone is now fighting more than 30 lawsuits across the country, as states argue the company is running an unlicensed sportsbook. Kentucky and North Carolina are now taking matters into their own hands, moving to tax prediction market providers in a way similar to sportsbooks.
How Prediction Markets Actually Make Money
Prediction markets differ from legalized sports betting providers (which take the other side of the wager with additional vig) in that they apply a fee to each prediction made. In an example, lets say a bettor bought one contract on Morocco to win against the Netherlands. At the time the match started, the market priced Morocco at 42%, meaning the contract cost $0.42. Using Kalshi’s formula of 7% multiplied by the number of contracts, the price, and one minus the price, Kalshi will collect $0.017052 (about 1.7 cents) per contract purchased. If this bettor instead bought 10,000 contracts, Kalshi would collect $170.52.
While sports betting providers manage risk by balancing action on both sides of a wager, prediction market providers do not face this same outcome risk. This is because their revenue comes from a fee charged on every trade. As trading volume increases, profitability also scales upwards, regardless of which side wins.
Profits have been especially strong for prediction markets due to their ability to access all U.S. states. As of 2026, 39 U.S. states have passed legislation allowing legalized sports gambling. Notably absent from that list are California and Texas, the two most populous states in the country. Yet residents of both states can already trade sports event contracts on prediction markets since the platforms operate under federal CFTC oversight rather than state gambling law. This access to two of the largest untapped markets in the country gives prediction market providers a meaningful trading-volume advantage that traditional sportsbooks do not have.
The Tax Wedge Favoring Prediction Markets Over Sportsbooks
In addition to their legal and regulatory advantage over sportsbooks, prediction market providers also have a tax advantage. For sportsbooks, gross gaming revenue (handle minus payouts) is subject to tax at the federal and state-level. While the federal income tax rate is 21% for U.S. corporations, the tax rate at the state-level can fluctuate across states – as low as 6.75% in Nevada and as high as 51% in New York and Rhode Island. Thus, sports betting providers can be paying out a significant portion of their profits to federal and state taxing authorities.
In contrast, prediction market providers are not subject to these state gaming taxes. Instead, the providers typically only face ordinary corporate income tax, which is a flat 21% income tax rate at the federal level combined with the state’s corporate income tax rate.
The difference in taxation applied to sports betting providers and prediction market providers has created a tax wedge that benefits prediction markets. For instance, consider a sports book and a prediction market that each collect $100 in net gaming revenue from the same sports outcome. Holding federal income taxes constant, in New York, the sports book will pay $51 in taxes and retain $49 in after-tax income. Meanwhile, assuming an identical revenue base, the prediction market provider will pay $7.25 in taxes and retain $92.75. Thus, even with the pre-tax profits being the same, the prediction market provider will collect $43.75 more in after-tax earnings.
States Are Suing, Banning, And Taxing Prediction Markets
In highlighting that prediction markets have generally devolved into sports books, many states have taken the offensive with legal action against these providers. For instance, the state of Arizona has filed criminal charges against Kalshi for operating an illegal gambling business, according to NPR. The state attorney general claims that sports betting is regulated by the Arizona Department of Gaming and that operating an unapproved gambling operation within Arizona is against state laws. A federal judge has since paused the prosecution while the broader jurisdictional dispute is litigated.
Other states have attempted to issue cease-and-desist orders and statewide bans on prediction market wagers. Both Nevada and Michigan have won injunctions barring prediction market providers from offering sports contracts. However, implementing the ban has been difficult as investigators in Nevada have noted that they can still make predictions within the state boundaries, according to ABC 13. Massachusetts also won its case against prediction market providers. However, users can still place wagers on prediction markets as the case moves through the appeals process.
Even where states have won in court, enforcement has proven difficult to implement. Furthermore, other states, like New Jersey, have lost outright. In a federal appeals court, Kalshi prevailed, allowing prediction markets to operate in New Jersey, according to Forbes.
Kentucky and North Carolina have taken a different strategy to fighting against the prediction markets. In April of 2026, the state of Kentucky enacted a 14.25% excise tax on prediction market operators’ transaction fees, according to the Kentucky Lantern. While this matter is currently being litigated, it marked the first time that a state imposed a tax on prediction markets beyond the corporate income tax rate. This move has since been followed by North Carolina. In its latest state budget that is expected to be voted on by the legislature this week, North Carolina is imposing a 6% tax on net trading fee revenue from prediction markets operating within the state, according to WRAL.
These taxes are first of their kind in the U.S., and it sets a new precedent that other states could potentially follow. For instance, the 6% tax on net trading fee revenue in North Carolina is substantially higher than the 2% corporate income tax rate, and it can be used to narrow the tax wedge between what sports betting providers must pay and what prediction market providers must pay. Furthermore, this tax on the providers will likely increase total tax collections in the state, providing substantial monetary benefits. Thus, other states may be watching Kentucky and North Carolina to see if these moves to tax the prediction market companies pays off.
Where This Leaves Prediction Markets
Prediction markets have grown into a multibillion-dollar-a-month industry by exploiting a regulatory and tax framework that gives them a real edge over licensed sportsbooks, and states are now fighting back with everything from criminal charges to new excise taxes, with mixed results so far. With a split forming in the courts and with Supreme Court intervention increasingly seen as inevitable, the question isn’t whether prediction markets face a reckoning, but when, and who gets to write the rules.