Kalshi, the prediction market operator, took Illinois to federal court on Wednesday, arguing that the state simply has no authority to slap taxes on prediction markets. The legal challenge targets a freshly signed Illinois law that is about to impose a steep levy on sports-related wagers.
The fight traces back to last week, when Illinois governor JB Pritzker signed a bill into law. Alongside creating a statewide tax on crypto transactions, the legislation also set up a 'Sports Wagering Fund.' That fund is scheduled to go live on July 1, and it will tax the gross receipts from sports-related prediction market wagers at a rate of 15%.
The core of the dispute
At the heart of the clash is one fundamental question: what exactly are prediction markets? By taxing these wagers, Illinois has taken the position that sports-related prediction markets are really just a form of state-regulated sports betting. Industry leaders and President Donald Trump's administration see it very differently, contending that these are swaps overseen by the CFTC at the federal level rather than anything the states get to regulate.
That distinction is exactly why Kalshi has now sued the government of Illinois. The company argues that the state has no right to tax its sports-related income, which, it insists, does not amount to gambling-related revenue at all.
What Kalshi fears
The stakes spelled out in the company's complaint underline just how serious this battle is. 'On July 1, 2026… Kalshi will be subject to criminal penalties in Illinois unless it either ceases to offer Illinois residents sports event contracts that are perfectly lawful in the eyes of Kalshi's exclusive federal regulator or pays Illinois millions of dollars and submits to the state's regulatory regime,' the complaint reads.
Kalshi's move follows the path already laid by the Trump CFTC. Last week, the CFTC amended an existing lawsuit against Illinois to protest the new tax, and it also filed a motion for a preliminary injunction aimed at stopping Illinois from putting the law into effect next week.
Crypto faces the tax too
Notably, Illinois is also gearing up to start taxing Bitcoin and other crypto transactions, a measure that critics have hammered as the 'most punitive' tax around.
A nationwide legal war
The skirmishing over the new Illinois tax is only the latest twist in a much larger, ongoing battle. Across the country, states and the federal government are locked in a jurisdictional war over who gets to decide the fate of prediction markets. The Trump administration has thrown its full weight behind the fast-growing sector, even as states on both sides of the aisle, red and blue alike, argue that platforms such as Kalshi and its rival Polymarket are serving up unregulated gambling to customers as young as 18.
Lawsuits over the issue are now playing out in nearly every federal jurisdiction. That is why many expect the entire question to land, eventually, before the U.S. Supreme Court.
