CFTC Sues Kentucky, Kalshi Challenges Illinois After States Move Against Prediction Markets
The filings target the states' recently enacted measures to tax certain prediction market contracts.
The Commodity Futures Trading Commission (CFTC) sued Kentucky on Monday following the state’s recent enforcement actions against Kalshi and Polymarket. Separately, Kalshi filed suit against Illinois after lawmakers enacted a measure that taxes and regulates sports-event contracts.
Both lawsuits argue that the Commodity Exchange Act (CEA) grants the CFTC exclusive jurisdiction over event contracts traded on federally regulated designated contract markets (DCMs), preempting state gambling laws.
The filings further expand the prediction market industry’s growing conflict with state regulators. Kentucky joins eight other states sued by the CFTC, but becomes the first Republican-led jurisdiction to be challenged by the agency.
CFTC Challenges Kentucky’s Lawsuits, Prediction Market Tax
In its complaint, the CFTC argued that Kentucky’s recent enforcement actions and prediction market tax unlawfully interfere with federally regulated exchanges.
The agency challenged lawsuits filed by Kentucky Attorney General Russell Coleman against Kalshi, Polymarket, Robinhood, Coinbase, and Webull. Those lawsuits alleged that the companies were facilitating unauthorized sports wagering and violating Kentucky consumer protection laws.
The complaint calls the lawsuits “the latest entries in Kentucky’s campaign to banish prediction markets from within their borders.” It also challenges the state’s newly enacted prediction market tax.
Kentucky recently enacted House Bill 757, which imposes a 14.25% tax on prediction market revenue. Lawmakers also enacted House Bill 904, which prohibits licensed sportsbooks from partnering with prediction market platforms beginning July 15.
The CFTC complaint argues that the tax effectively makes it impossible for federally regulated exchanges to operate in Kentucky. It invokes the Supreme Court’s longstanding observation that “the power to tax involves the power to destroy.”
Kalshi Challenges Illinois Prediction Market Tax
The same day, Kalshi filed a lawsuit against Illinois.
The lawsuit targets Senate Bill 3019, recently enacted as part of Illinois’ fiscal year 2027 budget package. The law classifies sports-event contracts offered on prediction markets as sports wagering, creates a tax framework, and requires operators to obtain state licenses.
According to Kalshi, the law places the company in an impossible position. Beginning July 1, the company would either need to stop offering sports-event contracts to Illinois residents or submit to a state licensing framework that conflicts with federal requirements governing designated contract markets.
Kalshi argued that the law directly conflicts with CFTC regulations requiring federally regulated exchanges to provide nationwide access to their markets.
The complaint states that Senate Bill 3019 “is preempted several times over.”
Kalshi argues that the measure conflicts with CEA’s “exclusive jurisdiction” provision and intrudes into the field of exchange-traded derivatives that Congress has reserved entirely for the federal government. Further, Kalshi says it forces regulated exchanges to choose between violating federal or state law.
The company further noted that the CFTC has already filed a separate lawsuit against Illinois. Last week, the agency amended its suit to directly challenge Senate Bill 3019.
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