Kalshi and Polymarket form an alliance to sue Kentucky: 14.25% prediction market tax is discriminatory and unconstitutional

Kalshi, Polymarket, Crypto.com's three major prediction market platforms form the "Fair Market Alliance," and on June 13th, they filed a lawsuit in Kentucky court, challenging the state's pioneering 14.25% prediction market transaction tax, claiming the tax rate is discriminatory, unconstitutional, and conflicts with federal law.
(Background: Former SEC Chair Gensler strikes again! Op-eds criticize the CFTC: Prediction markets are not derivatives, so they should be regulated by state gambling laws.)
(Additional background: Arizona sues Kalshi on 20 criminal charges: unlicensed gambling + accepting election bets, escalating prediction market litigation.)

Table of Contents

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• 14.25% vs. Horse Racing 9.75%: Alliance claims double standards in tax rates
• Kalshi: Pushing people toward unregulated illegal platforms
• Attorney General fires back with gambling terminology
• Shadow of insider trading: Santos case and U.S. military personnel incident surface
• Federal vs. State: New front in prediction market legal battles

The three major prediction market platforms join forces. Kalshi, Polymarket, and Crypto.com have formed the "Fair Market Alliance" and filed a lawsuit this week on June 13th in Kentucky court, directly challenging the state's pioneering 14.25% prediction market transaction tax, arguing that the tax rate is discriminatory, unconstitutional, and conflicts with federal law.

14.25% vs. Horse Racing 9.75%: Alliance claims double standards in tax rates

The core controversy lies in the obvious disparity in tax rates. In April this year, Kentucky's legislature passed legislation imposing a 14.25% sales tax on transaction fees for prediction market operators, but the state's traditional horse racing betting operators are taxed at only 9.75%, a nearly 46% difference.

The complaint directly states that Kentucky deliberately protects its "favored existing industries" by discriminating against emerging prediction markets. The complaint further notes: "Currently, no state imposes specific consumer taxes on derivative trading conducted on federally designated exchanges, let alone Kentucky's targeted and discriminatory tax system."

Kalshi: Pushing people toward unregulated illegal platforms

Kalshi emphasizes in its declaration that imposing additional taxes on federally regulated markets "will only push people toward unmonitored, unprotected illegal platforms." The company states: "Kalshi is a domestically regulated U.S. company. We are joining this lawsuit to defend the right of Kentucky residents to access safe, legal markets."

The alliance believes that this new tax will dampen operators' willingness to operate in Kentucky, effectively hindering the development of federally regulated legal prediction markets locally.

Attorney General fires back with gambling terminology

Kentucky Attorney General Russell Coleman remains firm, declaring he will defend state law.

Coleman stated in his announcement: "Our office will defend these regulations against foreign companies attempting to overturn Kentucky's sports betting laws. In any court, our lawyers are strong contenders for victory."

Shadow of insider trading: Santos case and U.S. military personnel incident surface

The background of this legal battle is that, while prediction markets have recently sought public and policymaker recognition, they have repeatedly faced insider trading controversies, increasing regulatory pressure.

Recent high-profile cases include: Former U.S. Congressman George Santos being investigated for allegedly illegally betting on prediction markets about whether he would attend President Trump’s national security speech. Another case involves a U.S. Army soldier, charged in April, accused of using confidential intelligence to bet on the timing of military actions against Venezuela on Polymarket, profiting up to $400k.

Both cases point to the same issue: potential loopholes in prediction markets under information asymmetry, providing states with reasons to tighten regulation.

Federal vs. State: New front in prediction market legal battles

Kentucky's lawsuit marks a new phase in U.S. prediction market regulation disputes, extending from federal regulatory jurisdiction to constitutional questions about whether states can independently impose taxes.

Platforms like Kalshi and Polymarket have long emphasized their regulation under the U.S. Commodity Futures Trading Commission (CFTC), claiming federal legality; but whether states can still set separate tax thresholds outside the federal framework remains unresolved. If Kentucky loses this case, other states seeking to follow suit may face legal obstacles; if they win, it could trigger a wave of state legislation, increasing compliance costs and regulatory fragmentation for prediction market platforms.