Over the weekend, the Associated Press reported that the Coalition for Fair Markets – an advocacy group that includes Kalshi, Polymarket, and Crypto.com as its members – has sued Kentucky to block the state’s 14.25% transaction tax on prediction platforms. The state tax, considered to be the first of its kind, was passed by the Kentucky General Assembly on April 2nd of this year.
Kentucky legalized retail and online sports betting in 2023, and is one of the few states in the US that allows customers as young as 18 to participate in the activity (although some licensed sportsbook apps only allow customers who are 21 years of age or older). Most of that tax revenue is sent to the Kentucky General Fund, which a small percentage of proceeds earmarked for problem gambling awareness and treatment.
The state argues that prediction market revenue – derived from fees on all trades/transactions – should be taxed at a rate of 14.25%. Kentucky charges that same rate on adjusted gross revenue of its licensed sports betting apps, while retail sportsbooks must pay 9.75% excise tax on accepted wagers. By comparison, the state assesses a per-handle fee ranging from 1.5% to 3.75% on pari-mutuel betting.
According to the AP, Attorney General Russell Coleman stated over the weekend that he will battle in the courts against the latest legal filing submitted by the Coalition for Fair Markets. “You can bet our Office will defend these statutes and the people of our Commonwealth from out-of-state companies that seek to cancel Kentucky’s sports betting laws,” Coleman told the AP. “In any courtroom, the attorneys with the AG’s Office are the odds-on favorite to win.”
While the state is not currently engaged in taxing prediction market exchanges such as Kalshi and Polymarket, the corresponding state legislation (House Bill 904) will go into effect next year. “On and after January 1, 2027, an excise tax is hereby imposed on a prediction market operator at the rate of fourteen and one-quarter percent (14.25%) of the prediction market operator’s transaction fees,” reads page 239 of the bill.
Furthermore, the legislation explicitly states that the excise tax does not form part of any attempt by the state to legalize or license prediction market platforms. “It is the purpose and intent of the General Assembly to levy taxes on persons engaged in the operations of a prediction market. It is not the intent of the General Assembly to legalize these activities,” reads Page 240.
Subsequent to the January 2027 enactment date, the new Kentucky taxation law adds that “any prediction market operator who violates any provision of this section shall be subject to the uniform civil penalties.”
A court date to hear the Coalition for Fair Markets dispute with the state of Kentucky has yet to be set. “No State currently levies a State-specific excise tax of any kind on derivatives transactions that take place on a federally designated exchange, let alone the sort of specifically targeted and discriminatory tax that Kentucky has imposed here,” claims the prediction market advocacy group in Friday’s legal filing.
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