A lawsuit has been initiated by the Coalition for Fair Markets, a newly formed industry group comprising prominent players in the prediction market sector, including Kalshi, Crypto.com, and Polymarket US. The coalition is seeking to challenge Kentucky’s newly introduced 14.25% tax on prediction market transaction fees, describing it as an unlawful maneuver that unfairly targets federally regulated event contract exchanges.
Filed in the Franklin Circuit Court of Kentucky, the lawsuit takes aim at restrictions imposed by the state that bar licensed gaming operators from forming partnerships with platforms offering sports event contracts. This legal action represents the industry’s most direct challenge to Kentucky’s April tax package, which uniquely positions the state as the first to enact a dedicated tax on prediction market transaction fees; Illinois has since followed suit.
Kalshi spokesperson Jacki McGavick expressed concerns regarding the implications of the tax, noting that it would adversely affect Kentuckians. “Taxing federally regulated markets doesn’t make anyone safer,” she stated, emphasizing that such legislation could push individuals towards unregulated platforms lacking oversight and protection. McGavick underscored Kalshi’s commitment to advocating for access to safe, legal markets for Kentucky residents.
The coalition asserts that Kentucky’s tax scheme is not merely a standard taxation process, but a targeted effort to penalize federally regulated prediction markets, perceived as a threat to the state’s gaming industry. Legislative comments supporting the tax hint at an intention to privilege established in-state gaming operators, further complicating the regulatory landscape for new market entrants.
The lawsuit challenges three specific bills—HB 757, HB 904, and HB 869—collectively known for enacting the 14.25% tax and associated restrictions. The coalition’s stance is that the law violates federal preemption principles by applying a discriminatory tax treatment exclusively to federally regulated exchanges, arguing it cannot evade federal oversight by specifically targeting such markets.
In comparing rates, the complaint notes the disparity between the higher tax levied on prediction markets and the 9.75% tax imposed on wagers at the state’s horse tracks, suggesting that Kentucky’s classification of prediction markets as akin to gambling is inconsistent. The lawsuit also critiques the state’s reach, claiming the law attempts to extend Kentucky’s taxing authority beyond its borders, affecting Kentucky residents trading event contracts outside state lines.
The formation of the Coalition for Fair Markets marks a significant step in unifying competing prediction market operators under a single legal umbrella. Established in April 2026, the coalition aims to safeguard participants’ rights within prediction markets while advocating for their legal recognition as a valid form of expression and commerce.
Moving forward, the coalition is pursuing both declaratory and injunctive relief to bar Kentucky from enforcing the contested laws. The urgency of the case is heightened by the upcoming restrictions on state-licensed gaming operators, scheduled to take effect on July 15, and the tax, anticipated to begin in January 2027.
As the landscape for prediction markets shifts, other states have similarly attempted to restrict these platforms through various enforcement measures. The ongoing legal battle in Kentucky could set a crucial precedent regarding state taxation authority over federally regulated derivatives markets, especially given its unprecedented nature as no other state has enacted a similar specific excise tax to date.
