INTRODUCTION

Prediction markets are booming in popularity, allowing users to place bets on just about anything, including elections and sports.[1] While prediction market platforms are relatively new, their emergence has brought with it a lot of legal uncertainty. These platforms essentially operate as legal workarounds in the financial industry. Prediction market platforms successfully rebranded their products as derivatives, rather than wagers, and labeled their activity as risk management instead of gambling. Further, the platforms have adopted potentially misleading terminology as they refer to themselves as “designated contracts markets” instead of sportsbooks and refer to their participants as “traders” and “investors” instead of bettors.[2] They have secured federal status as designated contract markets under the Commodity Futures Trading Commission (CFTC), which has allowed them to effectively circumvent state-level gambling laws.[3] Thus, major prediction market platforms like Kalshi and Polymarket have utilized regulatory arbitrage to its full advantage. This substance over form maneuvering has allowed them to operate in states where gambling is illegal, ignore the standard age requirements, and avoid paying state taxes.

SIDESTEPPING GEOGRAPHIC PROHIBITIONS

After Murphy v. NCAA, the authority to regulate sports betting was returned to the states.[4] This decision allowed each state to determine for itself whether to permit, license, and tax gambling. While many states have fully legalized sports betting, a few states, like California and Texas, have elected not to do so.[5]

Polymarket platforms, primarily Kalshi and Polymarket, have effectively argued that because they are federally regulated exchanges, they can legally operate in all fifty states.[6] In turn, state-level bans and restrictions are thus preemptively void against them.[7] This has allowed polymarket platforms to claim exclusive jurisdiction over its operations across the entire United States, which practically speaking, serves to legalize gambling in states where gambling is illegal. For example, online sports betting is illegal in Texas, but Kalshi and Polymarket actively operate in these states, permitting users to “trade” on the outcomes of sport events.[8]

Therefore, federal preemption permits these platforms to operate in spaces that should properly be governed by state law. By rebranding their products as derivatives rather than wagers, prediction market platforms are successfully circumventing states’ Tenth Amendment rights and undermining their ability to govern state-wide gaming industries through their police power.[9]

SIDESTEPPING STATE AGE REQUIREMENTS

Prediction markets like Kalshi and Polymarket are also utilizing legal loopholes to build a “shadow gambling” industry. In almost every state, you must be twenty-one years of age to enter a casino or to place sports bets.[10] State age requirements are meant to protect consumers from the high risk and addictive nature of gambling.[11] However, because these platforms are characterizing their bets as derivatives (or financial products), they are governed by federal law under the CFTC, not state laws.[12]

Under the CFTC, anyone eighteen years of age or older is permitted to open an account and place bets. Accordingly, this reclassification lowers the barrier to entry of gambling for younger, more vulnerable individuals. In fact, many bets are made using cryptocurrency on a publicly viewable ledger with the identities of the trading accounts made anonymous.[13] For example, while an eighteen-year-old in Texas is legally barred from betting through a sportsbook, that same eighteen-year-old can trade thousands of dollars on a mobile app under the CFTC.[14]

Accordingly, prediction market platforms are sidestepping the states’ power to regulate predatory activities that target younger populations. While the form of these transactions is labeled as a “financial product,” the substance remains the same: wagering and betting. In sum, these platforms exploit this distinction to circumvent age-based safeguards meant to allow states to protect their younger citizens.

SIDESTEPPING STATE TAXES

Legalized sports betting, operating largely through DraftKings and FanDuel, is taxed heavily in the states where it occurs. “The highest tax rates are levied in New Hampshire, New York, Oregon, and Rhode Island at 51% of sportsbook revenues. Nevada and Iowa levy the lowest tax rates at 6.75%.”[15] The revenue generated from taxing sports betting in part goes towards funding “public schools, roads, highways, law enforcement and gambling addiction treatment.”[16]

Since prediction markets are federally regulated as designated contract markets, they do not pay state-level gambling taxes. Instead, they are only subject to standard corporate income tax rates.[17] Consequently, states are losing out on millions of dollars in revenue because the prediction market activities are now classified as trading rather than wagering, despite functioning in substance as gambling.[18] The American Gaming Association “estimates states have lost out on more than $570 million in sports gambling tax revenues since prediction markets began offering sports events contracts.”[19] In addition to lost state revenue, the rise of prediction markets threatens the stability of the commercial gaming industry itself due to the possibility of mass migration from sportsbooks to prediction market platforms.[20]

Thus, despite resembling gambling in practice, prediction markets use their status as financial derivatives to avoid paying significant state taxes. This allows prediction market platforms to operate in various states without contributing to local revenue, thereby encroaching on states’ rights to tax such activities.

CONCLUSION

The classification of prediction market platforms as derivatives offers them a lighter regulatory burden than state gambling oversight. This has given rise to federal lawsuits regarding its legality and the encroachment on state rights across the country.[21] Of these lawsuits, eight have arisen “from state gambling commissions and Indian tribes accusing Kalshi of operating an unlicensed sports gambling platform” and five lawsuits have been “filed by individuals who argue Kalshi is an illegal service that is worsening gambling addiction.” In addition, plaintiffs in four of those cases seeking are class-action status.[22]

Ultimately, these cases will determine whether the “derivative” label will continue to shield predictive market platforms or if the courts will look past the form to the substance of the transactions and hold these platforms accountable for sidestepping geographic prohibitions, state age requirements, and state taxes.

[1] Amy Fan, How Anonymous Bettors Cashed In on the Iran Strike, Just Hours Before It Happened, N.Y. TIMES (Mar. 3, 2026), https://www.nytimes.com/2026/03/03/upshot/prediction-markets-iran-strikes.html.

[2] Ben Bloom, Prediction Markets vs. Sports Betting: Similar Mechanics, Different Outcomes, SPORTS ILLUSTRATED (Mar. 3, 2026), https://www.si.com/betting/prediction-market/prediction-markets-101/prediction-markets-vs-sports-betting.

[3] Prediction Markets: Global Approaches to an Emerging Challenge, INT’L ASS’N OF GAMING REGUL. (Feb. 26, 2026), https://iagr.org/industry-news/prediction-markets-global-approaches-to-an-emerging-challenge/.

[4] Murphy v. Nat’l Collegiate Athletic Ass’n, 584 U.S. 453, 483 (2018).

[5] David Purdum & Shwetha Surendran, How Kalshi and Prediction Markets are Disrupting Sports Betting, ESPN (June 2, 2025), https://www.espn.com/espn/betting/story/_/id/45377686/kalshi-prediction-markets-disrupt-sports-betting.

[6] Anna Betts, Surging Prediction Markets Face Legal Backlash in US: ‘Lines Have Been Blurred’, THE GUARDIAN (Feb. 17, 2026), https://www.theguardian.com/business/2026/feb/17/us-prediction-markets-lawsuits-kalshi-polymarket

[7] Karen M. Lent, Anthony J. Dreyer & Robert A. Fumerton, Sports Prediction Markets Emerge as a New Legal Battleground, REUTERS (Nov. 6, 2025), https://www.reuters.com/legal/legalindustry/sports-prediction-markets-emerge-new-legal-battleground–pracin-2025-11-06/.

[8] Delaney Wolovlek Focus Four: Prediction Markets Offer Legal Way to Bet Super Bowl in Texas, KBTX (Feb. 9, 2026), https://www.kbtx.com/2026/02/09/focus-four-prediction-markets-offer-legal-way-bet-super-bowl-texas/.

[9] Ken Sweet, Trump Administration Backs Kalshi and Polymarket as States Move to Ban Prediction Markets, PBS NEWSHOUR (Feb. 17, 2026), https://www.pbs.org/newshour/politics/trump-administration-backs-kalshi-and-polymarket-as-states-move-to-ban-prediction-markets.

[10] Alexander Korsager, Legal gambling age in every US state & where you can gamble, CASINO.ORG, https://www.casino.org/us/local/guide/ (last visited Mar. 8, 2026).

[11] Murphy v. Nat’l Collegiate Athletic Ass’n, 584 U.S. 453, 483 (2018).

[12] INT’L ASS’N OF GAMING REGUL., supra note 3.

[13] Fan, supra note 1.

[14] Purdum & Surendran, supra note 5.

[15] Adam Hoffer & Jacob Macumber-Rosin, Online Sports Betting Taxes by State, 2025, TAX FOUNDATION (Sept. 16, 2025), https://taxfoundation.org/data/all/state/online-sports-betting-taxes/.

[16] Adam Grundy, Legal Sports Betting a Growing Source of Tax Revenue for Many States, U.S. CENSUS BUREAU (Feb. 13, 2024), https://www.census.gov/library/stories/2024/02/legal-sports-betting.html.

[17] Nathan Goldman, Prediction Markets Are Costing States Millions In Tax Revenue, FORBES (Mar. 9, 2026), https://www.forbes.com/sites/nathangoldman/2026/03/09/prediction-markets-are-costing-states-millions-in-tax-revenue/.

[18] Kevin Hardy, Kalshi and Polymarket are skirting laws on sports betting, states say, STATELINE (Mar. 6, 2026), https://stateline.org/2026/03/06/kalshi-and-polymarket-are-skirting-laws-on-sports-betting-states-say/.

[19] Id.

[20] See John Wright, Why Congress Must Urgently Restore the Gambling Loss Deduction, Ave Maria School of L. (Jan. 20, 2026), https://www.avemarialaw.edu/why-congress-must-urgently-restore-the-gambling-loss-deduction/.

[21] Bobby Allyn, Kalshi in court over 19 federal lawsuits. What’s the future of prediction markets?, NPR (Jan. 30, 2026), https://www.npr.org/2026/01/30/nx-s1-5691837/lawsets-prediction-market-kalshi.

[22] Id.