Prediction Markets: Who Gets to Tax Them?

States want to raise money from online prediction sites, but they’re not sure what those sites actually are. The debate centers on whether the sites should be treated like sports betting, financial derivatives, or something else entirely. If they’re seen as gambling, states could tax them the same way they tax sports books. If they’re viewed as financial exchanges, the Commodity Futures Trading Commission (CFTC) would have the say and taxes could come from platform fees instead. The problem is that many platforms, such as Kalshi, don’t act like a “house. ” They simply match people who think an event will happen with those who think it won’t, charging a small fee for each trade. They never take the other side of a bet, so they don’t profit from outcomes in the same way a sportsbook does.Because of this difference, using sports‑betting tax rules could overestimate the amount states can collect. The big numbers people quote—up to $20 billion in monthly trading volume—actually reflect the total value of contracts traded, not the money the platforms earn. The CFTC has already sued states that try to tax these markets, arguing they fall under federal jurisdiction. As courts decide these cases, the legal landscape may shift toward a national rule that taxes only transaction fees. Even if states succeed in setting up a tax, it could be short‑lived and vulnerable to legal challenges. A federal framework that ties taxes to platform fees would likely be stronger, but states still have room to enforce consumer protection and fraud laws related to prediction markets.