If you can’t beat ‘em, tax ‘em?
The legal wars between state gambling regulators and federally regulated prediction markets are still going strong.
In Nevada, it looks bad for the exchanges; in New Jersey, it’s a different story.
All of the courtroom drama will take months, and perhaps years more, to sort out the legality of sports-related event contracts. In the meantime, state lawmakers are getting ambitious and proposing ways to restrict, regulate, and even tax prediction markets.
And that tax revenue could be substantial, according to some estimates.
- Analysts estimate states could collect hundreds of millions in revenue by taxing prediction markets, but ongoing legal battles and regulatory conflicts make this unlikely in the near term.
- Proposed state actions include licensing, regulation, and taxes, though challenges like the difficulty in passing any legislation, federal oversight, and potential impact on existing sports betting markets complicate adoption.
- Some states like Iowa and Kentucky are already advancing bills to tax prediction markets, but their success depends on legal outcomes and whether operators comply.
Analysts at Jefferies, an investment bank, noted in an April 1 report to clients that there could be a “potential compromise” for the state-prediction market spat. Namely, the legalization, regulation, and taxation of prediction markets by the states.
“In theory, states would benefit from this, as it would provide more consumer protections, more tax revenue, and greater legal control over which event contracts could trade,” the report said. “Additionally, operators would also benefit as it would eliminate the legal issues currently under consideration, while also legitimizing the space to the broader public.”
The words “in theory” are doing a lot of heavy lifting here (more on that in a second), but, theoretically, there could be a substantial amount of tax revenue for states as well.
If states created a “similar” average tax structure to the one used for online sportsbooks in the U.S., an approximately 1% tax on trading volume “would seem appropriate,” the Jefferies analysts wrote.
Missed this last week, but Jefferies analysts floated the idea of an (admittedly "unlikely") compromise between states and prediction markets: legalization, regulation, and taxation. The investment bank estimated that those PM tax rates could yield states almost $500M a quarter. pic.twitter.com/nA9XFBRRa2
— Geoff Zochodne (@GeoffZochodne) April 8, 2026
Based on current trading volume estimates, such as around $33 billion for Kalshi in the first quarter of this year, a 1% tax rate could mean approximately $460 million in new state revenue per quarter, the Jefferies analysts wrote. That's “assuming today's numbers continue,” they added.
But before states start counting their new tax money, there are a few real-world obstacles in the way that may make this outcome “unlikely in the near term,” the report notes.
Let's be real here
First, you’d have to pass the necessary legislation. Passing any gambling bill in any given year is a challenge.
Moreover, while states without legalized online sports betting would get an entirely new revenue stream, those that have legalized online sports betting would “need to be mindful of potential cannibalization” from their authorized operators, the Jefferies report notes.
And then there’s the issue of prediction market operators accepting a state-level tax. Currently, they don’t believe state-level regulation applies to them (such as orders to cease trading of sports-related event contracts), arguing their federal oversight trumps that of the states.
“OSB-legal state gaming regulators already have a profitable tax revenue source in OSB, and there may be concerns around the ability to properly regulate prediction markets, as the CFTC currently claims jurisdiction in that regard,” the Jefferies report explains. “Finally, operators are likewise unlikely to apply for legalization under the current CFTC regime, given the (tax-free) status-quo has suited them just fine to-date.”
So, state taxes for prediction markets may be an unlikely thing for the time being. But is that stopping states from trying? No.
In Iowa, a bill passed the state Senate at the end of March that would require licenses for prediction markets in the state. Those permits would cost $20 million each upfront, and then require a $100,000 annual renewal. The legislation would also impose a 20% tax on the revenue received by the exchanges from fees paid by traders in the state.
The Iowa Legislative Services Agency's Fiscal Services Division estimated that the prediction market tax revenue (plus renewal fees) would range from around $2.2 million in 2028 to as high as $5.6 million in 2031. This doesn't include the $20-million fees that could be paid in year one.
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Plot twist
There’s a twist, too.
The bill would also impose a 20% excise tax for traders buying and selling event contracts on a federally regulated prediction market. However, that tax would only take effect six months after the state's attorney general tells the legislature that the tax for prediction market operators has been declared unconstitutional or cannot be enforced.
S.F 2470 passed the Iowa Senate on a 45-1 vote in favor. It is currently at the committee stage in the Iowa House of Representatives, awaiting further action, with no guarantee it will actually become law.
Still, the legislation would only apply to prediction markets until a court finds that event contracts are subject to Iowa’s sports wagering rules. That could be a nod to the lawsuit that a prediction market operator, Kalshi, filed against Iowa state regulators to fend off potential enforcement efforts.
Kentucky would become the first state in the country to tax prediction markets such as Kalshi and Polymarket under a broad tax bill headed to the desk of Gov. Andy Beshear (D). https://t.co/npZoqWWlDJ
— Bloomberg Tax (@tax) April 3, 2026
Yet Iowa isn’t the only state where lawmakers are dreaming of taxing prediction markets.
Sweeping gaming legislation that recently passed in Kentucky and that is now awaiting the governor’s signature includes a proposed 14.25% tax rate for prediction market operators’ transaction fees in the state.
A Kentucky-sized "if"
If operators pay it, of course. And that is a massive “if.”
“All-in, we view an outcome where states legalize and tax prediction markets as unlikely in the near term, as all the stakeholders face impediments to making a deal,” the Jefferies analysts noted.
