CFTC strikes back at Kentucky! Who decides the 14% tax on prediction markets?

CFTC Chair Takes Office, Sues 9 States in 6 Months; Kentucky's Market Taxation Faces Backlash.
(Background summary: Polymarket and Kalshi join forces to ban insider trading; Congress proposes legislation to take full control of prediction markets)
(Additional background: Charles Schwab partners with Cboe to launch S&P 500 "event options," as Wall Street giants enter the prediction market)

Table of Contents

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• CFTC Acts First: Sued a State Just Last Week
• Where Does the 14.25% Tax Come From
• Cross-State Battle Lines: Not Just Kentucky
• Implications of Prediction Markets for Taiwan

The U.S. Commodity Futures Trading Commission (CFTC) officially filed a lawsuit against Kentucky on Tuesday, contesting jurisdiction over prediction markets. This is the ninth state sued by CFTC since its new Chair Mike Selig took office last December. In its official statement, CFTC emphasized:

Kentucky is the latest action, and CFTC will maintain exclusive jurisdiction over prediction markets.

CFTC Acts First: Sued a State Just Last Week

The trigger was last Wednesday, when Kentucky first sued Polymarket, Kalshi, and partners Coinbase, Robinhood, and Webull, accusing these platforms of "operating without Kentucky gaming licenses, violating state laws."

Kentucky also claimed that these sports betting contracts "fully comply with the state's definition of 'sports gambling'," and stated that the platforms did not provide resources to identify or assist with gambling addiction.

CFTC countered with a lawsuit requesting a federal court to declare an agreement, naming Kentucky Governor Andy Beshear, Attorney General Russell Coleman, and Kentucky Horse Racing and Gaming Commission.

Where Does the 14.25% Tax Come From

CFTC additionally targeted a recent law passed in Kentucky: a 14.25% ad valorem tax on prediction market transaction fees.

"This tax makes the operation of prediction markets in Kentucky impossible," CFTC stated in the lawsuit.

To put it into perspective, if you bet $100 on Polymarket, the fee is about $2, but the 14.25% tax rate means an additional approximately $1.43 in costs per $100 transaction. For prediction markets with slim profit margins, this expense could significantly cut into profitability.

Cross-State Battle Lines: Not Just Kentucky

This is not CFTC's only front. A few weeks ago, CFTC also sued New Mexico, blocking the state from applying gaming regulations to Kalshi.

In May, U.S. President Trump posted on Truth Social supporting CFTC, stating that maintaining jurisdiction over prediction markets "is crucial."

Interestingly, Trump's eldest son Donald Trump Jr. has invested in Polymarket and serves on its advisory board, and is also an advisor to Kalshi.

Implications of Prediction Markets for Taiwan

The "jurisdictional battles" among U.S. states over prediction markets actually reflect the industry's rapid expansion. In Taiwan, currently, there is no dedicated prediction market, but Wall Street giant Charles Schwab has partnered with Cboe to launch S&P 500 event options. Meta has also been reported to be internally developing a prediction market app called "Arena."

Ultimately, the jurisdictional disputes among U.S. states may be resolved through federal regulation. If CFTC wins, Taiwan's market is more likely to adopt federal standards rather than fragmented state regulations.