Kentucky files lawsuit against Kalshi and Polymarket as legal fight over prediction markets escalates

Kentucky takes on big prediction markets

Kentucky’s Attorney General Russell Coleman just filed lawsuits against Kalshi and Polymarket, two of America’s biggest prediction market platforms. He says these companies are running illegal sports betting operations right under the state’s nose.

This isn’t just about one state being picky. Kentucky joins a growing list of states that are fighting back against what they see as unregulated gambling. The platforms argue they’re following federal rules, but Kentucky says they’re breaking state laws and avoiding important consumer protections.

What exactly are prediction markets?

Prediction markets let people buy and sell contracts based on whether real-world events will happen. You can bet on election results, economic indicators, weather patterns, and sports outcomes. The platforms say they’re offering financial tools, not gambling.

But here’s where it gets fuzzy. When you’re betting on whether a team will cover the spread or if a player will score a certain number of points, it sure looks a lot like sports betting.

Kalshi and Polymarket under fire

Kentucky’s lawsuits claim Kalshi and Polymarket offered sports-related wagers without a Kentucky license.

According to the Attorney General’s Office, Kalshi saw nearly $23 billion in contract volume in 2025, with 89% of that volume coming from sports wagering. The office also alleges that Polymarket offers sportsbook-style markets such as money lines, spreads, point totals, parlays, and prop bets.

Kentucky is asking the court for civil penalties and other relief, including an order that would prevent the companies from offering event contracts in the state unless they obtain a Kentucky sports wagering license.

The federal vs state battle

Here’s the core argument, who gets to regulate these markets? The platforms say they’re under the Commodity Futures Trading Commission’s jurisdiction because their contracts are swaps. That’s a federal agency, meaning states shouldn’t interfere. President Trump’s administration actually agrees with this view.

But Kentucky and other states say these contracts are just sports bets in disguise. They argue that state gambling laws apply, and platforms need to get licensed just like regular sportsbooks. This disagreement has created a messy legal situation with courts giving different answers depending on which state you’re in.

Little-known fact: The CFTC has sued at least 8 states for trying to regulate prediction markets, arguing that states are stepping on federal authority.

Kentucky joins a growing list of states

Kentucky is now part of a wider multistate fight over prediction markets. The CFTC has initiated legal actions involving nine states, including Kentucky, while state officials in places such as Arizona, Massachusetts, Michigan, Nevada and New York have challenged prediction market operators under gambling or consumer-protection laws.

The platforms have fought back in court, and the results have been mixed. Some rulings have favored state gambling regulators, while others have favored the prediction market companies’ federal-preemption arguments.

What does the CFTC says about all this?

The Commodity Futures Trading Commission has taken a firm position that federally regulated prediction-market event contracts fall under its authority. Including Kentucky, the CFTC has initiated legal actions involving nine states over efforts to rein in prediction markets.

That federal backing matters for Kalshi and Polymarket because the companies argue their event contracts belong under federal derivatives law rather than state gambling regulation. Kentucky and other states are still pressing their cases.

Kentucky’s new prediction market tax

Kentucky recently passed a law creating a 14.25% tax on prediction market transaction fees. That’s the first tax of its kind in the entire country. The tax is higher than what horse racing pays, which is just 9.75%. The prediction market companies say this is discrimination, plain and simple.

A coalition that includes Kalshi, Polymarket, and Crypto.com filed a lawsuit challenging this tax. They argue it’s unconstitutional and that it pushes people toward illegal platforms with no oversight.

The coalition’s lawsuit against Kentucky

The Coalition for Fair Markets isn’t taking Kentucky’s new tax sitting down. They filed a lawsuit saying the tax discriminates against prediction markets while favoring traditional gambling businesses.

No State currently levies a State-specific excise tax of any kind on derivatives transactions that take place on a federally designated exchange, the lawsuit claims. Kalshi called it a fight for Kentuckians’ access to safe, legal markets.

The gambling addiction concern

One of Kentucky’s biggest arguments is about consumer protection. State law requires gambling platforms to provide resources for people struggling with addiction. Kentucky says these prediction markets offer users few or no resources to identify gambling problems or find help.

This is a serious issue. When people can place bets anytime from their phones, addiction risks go up. Traditional sportsbooks have to include responsible gambling tools, self-exclusion options, and helpline information.

What do the platforms Say in their defense?

Polymarket and Kalshi aren’t just sitting quietly. A Polymarket spokesperson told reporters that Kentucky’s action runs counter to the CFTC’s established framework for regulating prediction markets. They’re confident they’ll win through the appropriate legal process.

Kalshi was even more direct. Kalshi is a federally regulated exchange; the CFTC is our regulator, not the states. Courts have already recognized this, and we’re confident they will here too, a spokesperson said.

The inside information problem

Prediction markets have faced some scandals recently. A US Army soldier was charged with using classified information to make a $400,000 profit on Polymarket by betting on military operations in Venezuela.

These incidents raise serious questions about whether prediction markets can be manipulated by people with inside information. If someone knows something the public doesn’t, they could clean up on these platforms.

Why might the Supreme Court decide this?

With courts and regulators reaching different conclusions across the country, legal experts say the dispute could reach the Supreme Court.

The central question is whether sports-related event contracts should be treated as federally regulated financial instruments, state-regulated gambling, or some combination of both.

If you want to see how legal and economic uncertainty is shaping decisions far beyond the courts, check out 14 reasons why Americans are leaving Kentucky in 2026 for a broader look at the pressures influencing where people choose to live.

What does this mean for regular people?

If you live in Kentucky or any state suing these platforms, you might not be able to use them much longer. States want to shut them down completely or force them to get sports betting licenses.

For everyone else, this battle shows how new technology often runs ahead of the law. Prediction markets are growing fast, and regulators are scrambling to catch up. Whether you see them as fun betting or serious financial tools, the courts will eventually decide their fate. Until then, the legal fight continues.

If you want a closer look at the realities shaping life in the state behind this legal fight, check out 13 painful truths about living in Kentucky in 2026 for a deeper dive into what residents are experiencing day to day.

Where do you stand on the prediction market debate? Should they be treated like sportsbooks or financial tools? Drop your thoughts in the comments, and if you found this breakdown helpful, give it a thumbs up.

This slideshow was made with AI assistance and human editing.

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