Kalshi sues Illinois over new tax on prediction market sports bets

Additionally, getting the state license would have cost Kalshi $15 million for the first four years, then $1 million annually. Kalshi—valued at $22 billion—considers the license too “costly and burdensome,” the complaint said. Specifically, Kalshi sued to block Illinois from requiring the platform to obtain the expensive sports betting license, verify that bettors are located in the state, and pay additional taxes. The company has alleged that states like Illinois are overstepping in attempting to regulate prediction markets as if they were sports wagering operators. Instead, a federal agency, the Commodity Futures Trading Commission (CFTC), has exclusive authority to regulate Kalshi, the platform argued. Further, Kalshi alleged that complying with Illinois law and restricting residents there would violate the CFTC’s requirements to provide uniform access nationwide to its platform. Without the court’s intervention, Kalshi will be forced to choose between violating state or federal law, the platform argued. It has asked the court to clarify that the CFTC alone can regulate prediction markets and to order a preliminary injunction stopping Illinois from lumping Kalshi in with traditional betting platforms like FanDuel. Without an injunction, Kalshi may face civil and criminal penalties, the platform said. According to Kalshi, complying with Illinois law—and a patchwork of state laws that could follow—would also require the platform to invest in expensive “technological solutions to limit access.” And there’s no guarantee that Illinois would grant the license, threatening irreparable harms, including income and reputation loss, Kalshi argued. The key fight that Kalshi and other prediction markets must win is over the legal definition of sports betting. Kalshi’s lawsuit comes after the CFTC sued Illinois in April. In that complaint, the CFTC alleged that what Illinois defined as illegal sports bets on Kalshi were rather permissible “swaps” on “directives contracts” known as “event contracts” that the CFTC allows, so that stakeholders can hedge their risks when navigating uncertain but financially significant events. In its complaint, Kalshi explained that event contracts “are financial tools used to mitigate risk” caused by future events. As Kalshi explained: “They identify a future event with several possible outcomes, a payment schedule for the outcomes, and an expiration date. Most commonly, event contracts involve a binary question: Every ‘yes’ position has an equal and opposite ’no’ position. For example, a derivatives contract might center around whether a magnitude 8 earthquake will take place in Los Angeles County before January 1, 2027. A purchaser may trade on either the ‘yes’ or the ‘no’ position on the contract. If an earthquake does take place in Los Angeles County before the end of the calendar year, then the ‘yes’ positions would be paid out.” The primary difference flagged by Kalshi is that there is no “bet” against the “house.” “Traders do not take a position against the exchange itself,” Kalshi said. Instead, “traders’ ability to hedge risk requires counterparties willing to assume risk in the hope of seeing a return.” Unlike sports bets, sports event contracts are financial tools for sports industry stakeholders, Kalshi argued. Examples included media companies hedging risks tied to viewership, advertisers weighing how lucrative a sponsorship might be, or insurance companies impacted by ticket revenue. “On so-called ‘prediction markets,’ users can make all the same wagers they can make at a traditional sportsbook. What team will win a game. The potential spread of a game. The total number of points in a game, and “prop” bets—asking how many points, rebounds, or some other statistic for each player. The same bets are made on sportsbooks. And nothing is different for the bettor.” “In short: both federal and state law confirm that sports betting occurs whenever someone stakes money on the outcome of a sports contest. That ordinary definition applies to event contracts on prediction markets,” the letter concluded. Illinois seems certain that there are many questions that courts must answer before prediction markets like Kalshi can keep taking sports wagers. In a motion to stay the CFTC’s lawsuit, Illinois raised questions such as: Are event contracts a form of gambling? And should states be allowed to regulate them alongside the CFTC? “The question whether prediction markets are subject to state or federal regulation (or both) began percolating in courtrooms across the country around fourteen months ago, and the results so far are mixed,” Illinois’ filing said. With the support of Donald Trump, the CFTC seems unlikely to back down from the fight with states. About a week before Illinois passed its law classifying prediction markets as sports betting operators, the CFTC proposed new rulemaking that lays out how the commission would manage its exclusive control over regulating these markets. As Illinois’ court battle continues, the CFTC is accepting comments from the public on their proposal through July 27. If Illinois wins its fight against Kalshi, the prediction market and the federal commission fear the state will be emboldened and next move to regulate “contracts concerning elections and other political events,” a recent CFTC court filing said. Those contracts have been subjected to ever-widening scrutiny over suspected insider trading, and senators have already banned themselves from prediction markets after some lawmakers were found trading on their own elections.