Prediction Markets Cost States $600M in Lost Tax Revenue

Robert Harris

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March 12, 2026

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Prediction markets are draining $600 million in annual tax revenue from U.S. states, and the fight over who controls them is escalating fast. Play’N Go’s Head of Government Affairs Shawn Fluharty put that figure on the table publicly, while states including Arizona, Illinois, and New York have issued formal warnings to Kalshi to stop offering sports event contracts to their residents. With Polymarket back in the U.S. market after CFTC clearance and Donald Trump Jr. sitting on advisory boards for both platforms, the regulatory battle has reached a political flashpoint.

Shawn Fluharty’s $600M Claim Puts a Price Tag on Regulatory Arbitrage

How Prediction Markets Sidestep State Gaming Tax Frameworks

Shawn Fluharty, Head of Government Affairs at Play’N Go, publicly stated that prediction markets have cost U.S. states $600 million in lost tax revenue over the last 12 months [1]. That figure represents the gap between what states would have collected under licensed sports betting frameworks and what they actually received while platforms like Kalshi and Polymarket operated under federal commodity trading rules instead. The distinction matters enormously: licensed sportsbooks pay state taxes ranging from 8.5% in New Jersey to 51% in New York, while CFTC-regulated prediction markets pay none of those levies.

The core of the arbitrage is jurisdictional. Kalshi and similar platforms classify their products as event contracts under the Commodity Exchange Act, placing them under federal CFTC oversight rather than state gaming commissions. This classification allows them to offer contracts on sports outcomes without obtaining a state gaming license, paying licensing fees, or remitting gaming taxes. For states that spent years building sports betting regulatory infrastructure after the 2018 Supreme Court ruling in Murphy v. NCAA, that is a direct financial hit.

Fluharty’s $600 million figure has not been independently audited, but it aligns with the scale of prediction market growth. Kalshi reported over $1 billion in trading volume on its sports markets in 2024 alone, and Polymarket processed more than $3.5 billion in total volume during the U.S. presidential election cycle. Even a modest tax rate applied to that activity would generate hundreds of millions in state revenue.

Polymarket’s Return to the U.S. Market Raises the Stakes

Polymarket re-entered the U.S. market in 2025 after receiving clearance from the Commodity Futures Trading Commission [1]. The platform had previously blocked U.S. users following a 2022 CFTC settlement in which it paid a $1.4 million fine for offering unregistered binary options contracts. Its return, now operating under a CFTC-registered framework, signals that the federal agency views these platforms as commodity exchanges rather than gambling operators.

Donald Trump Jr. serves on the advisory board of Polymarket and as a strategic advisor for Kalshi, a political connection that has drawn scrutiny from state regulators and gaming industry advocates who argue it gives prediction market operators unusual access to federal decision-makers. The Trump administration’s general posture toward deregulation has reinforced concerns among state gaming officials that federal agencies may continue to favor prediction market platforms over state-licensed operators.

The re-entry of Polymarket intensifies competition for the same pool of sports bettors that licensed sportsbooks have spent billions acquiring. For states, every dollar wagered on Polymarket’s sports event contracts instead of a licensed sportsbook is a dollar that generates zero state tax revenue.

Arizona, Illinois, and New York Warn Kalshi to Halt Sports Contracts

State Regulators Draw a Hard Line on Sports Event Contracts

Arizona, Illinois, and New York have each issued formal warnings to Kalshi, directing the platform to stop offering sports event contracts to their residents [1]. These states represent three of the largest legal sports betting markets in the country. New York alone generated $1.67 billion in gross gaming revenue from mobile sports betting in fiscal year 2024, making it the highest-taxed and highest-volume sports betting state in the nation.

The state warnings rest on a straightforward legal argument: offering contracts tied to the outcome of sporting events constitutes sports betting under state law, regardless of how the federal government classifies the product. Arizona’s Department of Gaming, Illinois’s Gaming Board, and New York’s Gaming Commission each have statutory authority to regulate sports wagering within their borders, and all three argue that CFTC registration does not override state jurisdiction on this point.

Kalshi has not complied with the cease-and-desist demands and has instead pursued litigation to establish that its products fall exclusively under federal jurisdiction. That legal confrontation is now producing binding court rulings that will shape the entire industry.

Michigan Federal Court Ruling Shifts the Legal Ground

A federal court in Michigan recently ruled that sports event contracts offered by Kalshi are likely not “swaps” under CFTC jurisdiction [1]. This ruling is significant because Kalshi’s primary legal defense relies on the argument that its contracts qualify as swaps, which would place them firmly under exclusive federal oversight and preempt state gaming laws. A finding that they are not swaps weakens that defense substantially.

The Michigan ruling does not definitively resolve the question, but it creates legal precedent that other federal courts may follow. If sports event contracts are not swaps, states gain a much stronger argument that their gaming laws apply, and platforms like Kalshi face potential enforcement actions in every state where they operate without a gaming license. The outcome of this litigation will determine whether $600 million in annual lost tax revenue becomes a permanent feature of the U.S. gaming market or a temporary gap that regulation closes.

Legal analysts tracking the Kalshi lawsuit expect the dispute to reach the federal appellate level before a definitive ruling emerges, potentially extending the regulatory uncertainty through 2026.

The CFTC Jurisdiction Debate: A 2025 Timeline of Key Events

The CFTC’s authority over prediction markets derives from the Commodity Exchange Act, which grants the agency jurisdiction over futures contracts and swaps tied to commodities and financial instruments. The legal question courts are now wrestling with is whether a contract on the outcome of a sporting event qualifies as a commodity contract or whether it is simply a bet dressed in financial language. The answer carries multi-billion-dollar consequences for both the prediction market industry and state-licensed gaming operators [1].

Kalshi first received CFTC approval to list political event contracts in 2023, setting the precedent that the agency would regulate outcome-based contracts on real-world events. The platform then expanded into sports, arguing the same logic applied. That expansion triggered the current wave of state opposition, because political event contracts do not compete directly with state-licensed gambling products, while sports event contracts do.

The American Gaming Association, which represents major licensed casino and sportsbook operators, has lobbied aggressively for Congress to clarify that sports outcome contracts fall under state gaming jurisdiction. The AGA argues that allowing CFTC-regulated platforms to offer sports contracts without state licenses creates an unlevel playing field that disadvantages operators who invested hundreds of millions in licensing, compliance, and responsible gambling infrastructure.

Congress has not yet acted, leaving the courts as the primary battleground. The Michigan ruling is the first significant judicial signal that states may have more legal leverage than prediction market operators initially assumed.

What This Means for Sports Bettors and Racing Fans

For sports bettors and racing fans, the prediction market debate is not abstract regulatory theater. It directly affects the number of platforms available to place wagers, the odds quality those platforms offer, and the long-term health of state-licensed markets that fund problem gambling programs and sports integrity initiatives. Prediction markets like Kalshi and Polymarket use a peer-to-peer contract model that can produce sharper pricing on major events than traditional sportsbook models, which is genuinely attractive to experienced bettors.

Horse racing and motorsports bettors operate in a market that has long navigated complex jurisdictional overlaps, with pari-mutuel wagering governed by the Interstate Horseracing Act and online platforms operating under a patchwork of state licenses. The prediction market fight echoes those earlier battles over who controls the regulatory framework and who collects the tax revenue. If prediction markets win broad CFTC protection, it could eventually extend to racing outcome contracts, creating a new category of federally regulated wagering that bypasses state racing commissions entirely.

The $600 million in lost state tax revenue cited by Fluharty also has a practical downstream effect: states with tighter budgets may respond by increasing tax rates on licensed sportsbooks to compensate, which historically leads operators to reduce promotional spending and tighten odds margins for consumers. New York’s 51% tax rate already pushes operators to offer less competitive lines than in lower-tax states, and further rate increases would compound that effect.

Key Takeaways

• Play’N Go’s Shawn Fluharty publicly estimated prediction markets have cost U.S. states $600 million in gaming tax revenue over the past 12 months.
• Polymarket returned to the U.S. market in 2025 after receiving CFTC clearance, years after paying a $1.4 million fine for unregistered binary options contracts in 2022.
• Arizona, Illinois, and New York have each issued formal warnings to Kalshi to stop offering sports event contracts to state residents.
• A Michigan federal court ruled in 2025 that Kalshi’s sports event contracts are likely not “swaps” under CFTC jurisdiction, weakening the platform’s primary legal defense.
• Donald Trump Jr. holds advisory roles at both Polymarket and Kalshi, adding a political dimension to the federal regulatory debate.
• New York generated $1.67 billion in mobile sports betting gross gaming revenue in fiscal year 2024 under its 51% tax rate framework, illustrating the scale of what states stand to lose.
• The American Gaming Association has lobbied Congress to clarify that sports outcome contracts fall under state gaming law, but no federal legislation has passed as of mid-2025.

Frequently Asked Questions

The Bottom Line

The $600 million figure Shawn Fluharty put on the table is not just an industry talking point. It is a concrete measure of how quickly the regulatory gap between prediction markets and licensed sportsbooks is costing states real money. Three of the country’s largest gaming tax states have already moved to enforcement mode against Kalshi, and the Michigan federal court ruling has given them a stronger legal foundation than they had six months ago. The question is no longer whether states will fight back. It is whether the courts or Congress will resolve the jurisdictional question before the revenue loss compounds further.

Polymarket’s return to the U.S. market under CFTC clearance, combined with Donald Trump Jr.’s advisory roles at both major platforms, means the political and commercial pressure to maintain federal oversight will remain intense. States are unlikely to win a quick legislative fix in the current federal environment. That puts the burden on litigation, and the Kalshi lawsuit is now the most consequential legal battle in U.S. gaming since Murphy v. NCAA in 2018.

For every stakeholder in the sports wagering ecosystem, from licensed sportsbook operators to state regulators to bettors who rely on competitive markets, the outcome of this fight will define the structure of legal sports wagering in America for the next decade. The $600 million already lost is the opening bid in a much larger negotiation.

Sources

1. Gambling911 – Source reporting on Fluharty’s $600M claim, Polymarket CFTC clearance, state warnings to Kalshi, Michigan federal court ruling, and Trump Jr. advisory roles.