Kalshi Prediction Market
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Monthly trading volume in prediction markets jumped from less than $5 billion in September 2025 to about $24 billion in April 2026, according to Pew Research Center. This nearly fivefold increase compares favorably with legalized sports betting in the US, which averages $14 billion per month. But the boom is creating tension: the prediction markets fall under the umbrella of the Commodity Futures Trading Commission, which has adopted a regulatory approach even as the industry’s popularity has soared.
Kalshi alone is fighting more than 30 lawsuits across the country as states allege the company operates an unlicensed sports book. Kentucky and North Carolina are taking matters into their own hands, moving providers of the tax prediction market in a manner similar to sports books.
How prediction markets make real money
Prediction markets differ from legitimate sports betting providers (who take the other side of the bet with an added vig) in that they apply a fee to each prediction made.
In an example, let’s say a bettor bought a contract on Morocco to beat the Netherlands. At the time the race started, the market priced Morocco at 42%, meaning the contract was worth $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 that player bought 10,000 contracts, Kalshi would collect $170.52.
While sports betting providers manage risk by balancing the action on both sides of a bet, prediction market providers do not face the same outcome risk. This is because their revenue comes from a fee charged on each transaction. As trading volume increases, profitability also scales upward, regardless of which side wins.
Gains were particularly strong for prediction markets due to their ability to access all US states. As of 2026, 39 US states have passed legislation allowing legalized sports gambling. Notably absent from this list are California and Texas, the nation’s two most populous states. However, residents of both states can already trade sporting event contracts on prediction markets, as the platforms operate under the CFTC’s federal oversight rather than state gambling laws. This access to two of the nation’s largest untapped markets gives prediction market providers a significant trading volume advantage that traditional sportsbooks do not have.
The tax wedge favoring prediction markets over sports betting
In addition to their legal and regulatory advantage over sports betting, prediction market providers also have a tax advantage. For sportsbooks, gross gaming revenue (handling minus payouts) is subject to federal and state tax. While the federal income tax rate is 21% for US corporations, the state tax rate can vary between states – as high as 6.75% in Nevada and as high as 51% in New York and Rhode Island. Thus, sports betting providers can pay a significant portion of their profits to federal and state tax authorities.
In contrast, prediction market providers are not subject to these state gambling taxes. Instead, providers typically face only standard corporate income tax, which is a flat 21% federal income tax rate combined with the state 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 example, consider a sportsbook and a prediction market that each collect $100 in net gambling 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 the same revenue base, the prediction market provider will pay $7.25 in taxes and keep $92.75. So, even with the same pre-tax profits, the prediction market provider will collect $43.75 more in after-tax profits.
States sue, ban and tax prediction markets
Underscoring that prediction markets have generally turned into sports books, many states have attacked with legal actions against these providers. For example, the state of Arizona has filed criminal charges against Kalshi for operating an illegal gambling operation, according to NPR. The state attorney general claims that sports betting is regulated by the Arizona Department of Gaming and that operating an unlicensed gambling business within Arizona is against state law. A federal judge has since halted the prosecution while the broader litigation is heard.
Other states have attempted to issue cease and desist orders and statewide bans on prediction market betting. Both Nevada and Michigan have won injunctions barring betting market providers from offering sports contracts. However, enforcing the ban has been difficult as researchers in Nevada have noted that they can still make predictions within the state’s borders, according to ABC 13. Massachusetts also won its case against the providers of the prediction market. However, users can still place bets on prediction markets as the case moves through the appeals process.
Even where states have won in court, enforcement has proven difficult to enforce. Additionally, other states, such as New Jersey, have missed out entirely. In a federal appeals court, Kalshi prevailed, allowing the prediction markets to operate in New Jersey.
Kentucky and North Carolina have adopted a different strategy to combat prediction markets. In April 2026, the state of Kentucky imposed a 14.25% excise tax on the trading fees of prediction market operators, according to the Kentucky traffic light. While this matter is currently litigated, it was the first time a state imposed a tax on provisioning purchases beyond the corporate tax rate. This move has since been followed by North Carolina. In its latest state budget expected to be voted on by the Legislature this week, North Carolina is imposing a 6 percent tax on the net trading commission income from prediction markets operating within the state, according to WRAL.
These taxes are the first of their kind in the US and set a new precedent that other states could potentially follow. For example, North Carolina’s 6% net commission income tax is significantly higher than the 2% corporate tax rate and can be used to narrow the tax gap between what sports betting providers have to pay and what prediction market providers have to pay. In addition, this tax on providers may increase overall tax receipts to the state, providing significant monetary benefits. So other states may be watching Kentucky and North Carolina to see if these moves to tax prediction market companies pay off.
Where that leaves the prediction markets
Prediction markets have grown into a multibillion-dollar-a-month industry, taking advantage of a regulatory and tax framework that gives them a real advantage over licensed sports betting, and states are now fighting back with everything from criminal charges to new excise taxes, with mixed results so far. With the courts divisive and Supreme Court intervention seen as increasingly inevitable, the question is not whether the prediction markets face a reckoning, but when and who gets to write the rules.
