How Much Tax Revenue Have States Lost to Prediction Markets?
State regulators estimate over $600 million in sports betting tax revenue has been lost to unregulated prediction markets. Here's how the number breaks down and what it means for the iGaming industry.
The American Gaming Association estimates that states have lost more than $600 million in sports betting tax revenue to wagers placed on prediction market platforms operating outside state gaming frameworks. This figure represents the aggregate tax shortfall across all US states with legal sports betting, calculated from the volume of sports-related wagers placed on platforms like Kalshi and Polymarket that aren't subject to state gaming taxes.
How the $600 Million Figure Is Calculated
The estimate comes from comparing prediction market sports wagering volume against state sports betting tax rates:
- Kalshi alone processed $1.9 billion in college basketball wagers in February 2026 — a single sport, a single month, on one platform
- The AGA projects $3.3 billion in total regulated sportsbook handle for the entire 2026 NCAA tournament across all licensed operators
- State sports betting tax rates range from 6.75% (Iowa, Nevada) to 51% (New York)
- Every dollar wagered on prediction markets instead of licensed sportsbooks reduces the state tax base
The comparison is stark: a single unregulated platform processed more than half the expected volume of the entire regulated industry for one of the biggest betting events of the year.
Why Prediction Markets Don't Pay State Sports Betting Taxes
Prediction market platforms argue they are federally regulated derivatives exchanges, not gambling operations. Under this framework:
- CFTC registration serves as the primary regulatory mechanism, not state gaming licenses
- The Commodity Exchange Act preempts state gambling laws, according to the CFTC's current position
- Prediction market contracts are classified as event contracts (financial derivatives), not wagers
- Platforms pay federal regulatory fees but no state gaming taxes
State regulators reject this classification. They argue that contracts on sporting events function identically to sports bets regardless of what label is applied.
State Responses to the Revenue Gap
States have responded through both legislation and enforcement:
- Eleven states issued cease-and-desist orders against prediction market operators as of March 2026
- Eleven states introduced prediction market legislation, ranging from outright bans to taxation frameworks
- Kentucky proposed a 17.25% tax on prediction market operators' transaction fees
- Arizona filed criminal charges against Kalshi — the first criminal prosecution of a prediction market in the US
- Hawaii passed a bill expanding the definition of gambling to include prediction markets
What This Means for iGaming Operators
The $600 million tax gap has tangible implications:
- State budgets that relied on sports betting tax projections face shortfalls
- Regulated operators face competition from platforms with lower tax-related costs
- Legislative pressure will likely increase as prediction market volume grows
- Tax frameworks for prediction markets will vary significantly by state, creating compliance complexity
The tax revenue argument is more politically potent than the jurisdictional legal debate. Budget shortfalls motivate legislators and attorneys general far more effectively than abstract questions about the Commodity Exchange Act.
Frequently Asked Questions
Is the $600 million figure verified?
The $600 million estimate comes from the American Gaming Association, which represents the regulated gambling industry. The AGA has an interest in framing prediction markets as competitors. However, the underlying volume data from prediction market platforms corroborates significant wagering activity that falls outside state tax frameworks.
Could states tax prediction markets without banning them?
Yes. Kentucky's HB 757 proposes a 17.25% tax on prediction market operators' transaction fees without prohibiting the platforms. This approach would allow prediction markets to operate while capturing some tax revenue, though the legal question of whether states can tax CFTC-regulated exchanges remains unresolved.
How does prediction market volume compare to regulated sports betting?
In February 2026, Kalshi alone reported $1.9 billion in college basketball wagers. The total US regulated sports betting handle for all sports typically ranges from $8-12 billion per month. Prediction market sports volume has reached a scale where it represents a material share of total US sports wagering activity.