Kentucky Leads New State Push to Tax Prediction Markets, Testing Limits of State Authority

Kentucky has become the first state to pass legislation explicitly taxing prediction market platforms, marking a shift in how states are approaching the fast-growing industry. The measure, included in a broader omnibus bill, applies taxes to platform revenue tied to in-state users, but stops short of establishing a regulatory framework for the exchanges.

Rather than banning the platforms outright, lawmakers are exploring ways to fold them into existing gaming structures or capture revenue from their activity. Proposals in Illinois and Iowa take that approach further, pairing taxes on prediction market activity with licensing, reporting, and consumer protection requirements.

That approach is now colliding with federal resistance. On April 2, the Commodity Futures Trading Commission (CFTC), alongside the U.S. Department of Justice, filed lawsuits against Arizona, Connecticut, and Illinois, challenging state enforcement actions against prediction market platforms. The agency argued that event contracts fall under its exclusive jurisdiction under federal law, a position that could complicate efforts in states like Illinois and Iowa to impose their own licensing and regulatory frameworks.

The outcome of those lawsuits could shape how far states can go in attempting to regulate prediction markets.

Kentucky targets prediction market revenue without licensing framework

Kentucky’s legislation introduces one of the clearest state-level efforts to tax prediction market platforms, without formally bringing them into a regulated gaming structure.

House Bill 757 cleared the legislature on April 1, when the Senate passed the measure and the House concurred with changes before final passage, according to the state’s legislative record. The vote came just before the start of Kentucky’s veto period on April 2, when bills are sent to the governor for approval or veto and lawmakers later return with the ability to override vetoes.

The measure creates a new excise tax on prediction market operators tied to activity from Kentucky users. It applies a 14.25% tax to platform transaction fees, matching the state’s tax rate on mobile sportsbooks, though applied to a different base tied to trading activity rather than sportsbook revenue after payouts.

The bill defines “transaction fees” to include both fees charged by the platform to execute trades and “the amount paid by a consumer to purchase an event contract,” expanding the tax base beyond standard platform fees. That approach differs from traditional sportsbook taxes and from how financial markets are typically taxed.

The bill makes clear that the state is not explicitly authorizing prediction market activity. “It is not the intent of the General Assembly to legalize these activities,” according to the legislation.

Separate bill reshapes gaming rules and restricts ties to prediction markets

A second measure, House Bill 904, carries significant changes to Kentucky’s gambling framework, while also addressing how prediction markets interact with the state’s regulated gaming industry.

HB 904 also cleared both chambers on April 1 ahead of the veto period and includes a range of gambling-related provisions, including raising the legal gambling age from 18 to 21 and establishing a more formal structure for daily fantasy sports operators.

The legislation also has a provision that could affect licensed gaming operators that are involved in event contract trading in the state. Sports betting licensees, horse racing operators, fantasy contest providers, and their affiliates are prohibited from participating in prediction market activity conducted in the Commonwealth of Kentucky.

That restriction was narrowed during the legislative process. Earlier versions would have barred licensed operators and their partners from participating in or doing business with platforms that offer event contract trading anywhere, effectively forcing some companies to choose between maintaining their Kentucky sports betting licenses or continuing to offer prediction market products in any market. That led DraftKings, FanDuel, and Fanatics, which all have prediction market products, to submit testimony to Kentucky lawmakers that said, as written, the bill would “force the exit of most, if not all, existing regulated operators from the Commonwealth.”

The final version of the bill includes an amendment that limits the restriction to activity within Kentucky, reducing the potential impact on operators with prediction market exposure elsewhere.

Iowa bill pairs taxation with full licensing framework

Iowa lawmakers are advancing legislation that mirrors Kentucky’s effort to tax prediction market activity, but goes further by requiring platforms to operate under a formal state licensing system.

The proposal, Senate File 2470, passed the state Senate on March 31 by a 45-1 vote and now moves to the House, with the legislative session set to adjourn later this month. 

The bill would impose a 20% tax on “adjusted revenues” from event contracts, defined as total charges and fees collected from Iowa trading activity minus payouts. The amended version of the bill also introduces a separate 20% excise tax on the purchase of event contracts, applied to the amount paid by users to enter positions. While the tax is imposed on operators, it is tied directly to each transaction, meaning platforms could potentially pass at least some of the cost onto users through pricing or fees, similar to how sportsbooks in Illinois added per-bet charges after tax increases.

Under the bill, platforms would be required to obtain a state permit to operate. The permit carries a $20 million initial fee and $100,000 annual renewal cost, alongside ongoing reporting and compliance requirements administered by the Iowa Department of Revenue. Operators would be required to verify user eligibility, restrict participation to individuals 21 and older, and implement consumer protection measures, including responsible gaming safeguards.

The framework effectively makes legality contingent on compliance, meaning prediction markets would be prohibited in Iowa unless operators are licensed, meet the regulatory standards, and pay the required taxes.

Illinois proposal includes 50% tax rate, regulatory structure

Illinois lawmakers have proposed a framework similar to Iowa’s, pairing taxation with a full regulatory structure, though the effort has yet to advance beyond the early stages of the legislative process. Senate Bill 4168 would require platforms to obtain a license from the Illinois Gaming Board and comply with a detailed set of rules governing operations, reporting, and consumer protections. The bill was introduced on March 5 and remains in committee.

Unlike Iowa, the Illinois measure proposes a significantly steeper tax structure. The bill would impose a 50% “privilege tax” on adjusted gross receipts derived from prediction market contracts involving Illinois users. At the same time, licensing costs are comparatively modest. Operators would be required to pay a $1 million initial license fee and $1 million annual renewal fee.

The legislation also defines which markets would be allowed, explicitly excluding sports event contracts.

CFTC lawsuit challenges state authority to regulate prediction markets

The approach of bringing prediction markets into a state-level licensing and regulatory system is now at the center of a growing legal challenge.

On April 2, the CFTC and the U.S. Department of Justice filed lawsuits against Illinois, Arizona, and Connecticut, targeting state actions aimed at restricting federally regulated prediction market platforms. The Illinois suit centers on cease-and-desist letters issued by the Illinois Gaming Board, which asserted that prediction market platforms offering sports event contracts were engaging in unlicensed sports wagering, an activity that requires state licensure under Illinois law.

In the Illinois complaint, the CFTC argues that Congress established a “comprehensive regulatory framework” for derivatives markets and granted the agency exclusive jurisdiction over those activities. The lawsuit alleges that Illinois is seeking to “prohibit CFTC-regulated ‘Designated Contract Markets’ from operating in Illinois” unless they comply with state law, which the agency says directly conflicts with federal authority.

While the lawsuits stem from enforcement actions rather than pending legislation, they send the message that states attempting to regulate prediction markets or impose their own operational frameworks may face federal pushback. That could have direct implications for proposals like Illinois’ SB 4168 and Iowa’s pending legislation, both of which seek to layer state-level licensing, compliance, and taxation onto federally regulated markets.

Derivatives firms pay state taxes across jurisdictions

The CFTC lawsuits focus on whether states can impose regulatory boundaries on prediction market platforms. Taxation raises a different question, one that may fall more squarely within traditional state authority.

States have long taxed companies operating in federally regulated financial markets, including derivatives exchanges, by applying taxes to business activity tied to in-state customers. Courts have upheld those systems when taxes are connected to in-state economic activity and fairly apportioned, under the framework established by the Supreme Court in Complete Auto Transit v. Brady.

Public filings from major derivatives operators illustrate that approach. In SEC filings, CME Group notes that it is subject to state and local income taxes across multiple jurisdictions. Other exchange operators, including Intercontinental Exchange, are similarly subject to state-level taxation on their business activity.

The proposals in Kentucky, Iowa, and Illinois follow that general concept by tying taxes to revenue associated with in-state users. But they differ in how that revenue is defined. Rather than applying taxes to overall business activity, the measures target revenue tied specifically to prediction market contracts.

That distinction could become important if these state tax measures are tested. While states have clear authority to tax business activity within their borders, a challenge could argue that taxes structured this way single out a specific type of federally regulated trading activity rather than applying to in-state business activity as a whole, potentially blurring the line between taxation and regulation. 

Under the framework established in the Complete Auto Transit decision, state taxes must not discriminate against interstate commerce, meaning they cannot be structured to favor or disadvantage particular economic activity. But that issue has not been directly tested in the context of prediction markets until now.

Mike Breen

Mike Breen has been a professional writer and editor covering a wide range of topics for more than 30 years. He’s been a freelance gaming industry writer since 2020, reporting on sports betting, online casinos, and more for various Catena Media sites, and he began reporting on prediction market industry news in 2025 for Prediction News. Prior to that, Mike was a founding editor at his hometown altweekly newspaper in Cincinnati, Ohio, where he extensively covered local arts, music and news.Mike’s published writing has received recognition and several awards from organizations like the Society of Professional Journalists and the Association of Alternative Newsmedia.When Mike is not working, he enjoys playing and listening to music, attending comedy shows, watching movies, and spending time with his family and three cats.