A new industry coalition that includes Kalshi, Crypto.com and Polymarket US has sued Kentucky to block the state’s first-of-its-kind 14.25% tax on prediction market transaction fees, arguing the law unlawfully targets federally regulated event contract exchanges.

The lawsuit, filed in Kentucky’s Franklin Circuit Court by Coalition for Fair Markets, challenges Kentucky’s new tax and related restrictions that bar state-licensed gaming operators from contracting with platforms that offer sports event contracts. The complaint says the coalition’s members are KalshiEX LLC, Crypto.com’s North American Derivatives Exchange Inc. and QCX LLC, Polymarket’s regulated U.S. exchange.

Kalshi spokesperson Jacki McGavick shared a statement from the company regarding the lawsuit.

“The people who get hurt by this tax are Kentuckians,” Kalshi said in the statement. “Taxing federally regulated markets doesn’t make anyone safer, it just pushes people toward illegal platforms with no oversight and no protections. Kalshi is an American company, regulated here at home, and we’re joining the fight for Kentuckians’ access to safe, legal markets.”

The case marks the prediction market industry’s first direct legal challenge to Kentucky’s April tax package, which made the state the first to enact a targeted tax on prediction market transaction fees. Illinois later followed with its own prediction market tax measure. 

The lawsuit also reveals the formation of a new Virginia-incorporated industry association that brings three rival CFTC-regulated prediction market operators under the same legal umbrella. McGavick said the decision to sue through the new coalition came down to legal strength.

“My understanding as to why we sued as a Coalition is just that it makes for a stronger case,” a source familiar with the decision told DeFi Rate.

The complaint argues Kentucky’s tax package is not an ordinary state tax on business activity, but a targeted effort to penalize federally regulated event contract exchanges because state lawmakers view prediction markets as a threat to Kentucky’s gaming industry.

“Notwithstanding Congress’s express command, Kentucky recently enacted legislation that directly targets and discriminates against federally regulated prediction markets,” the complaint says. It points to legislative comments describing prediction markets as a “threat to all gaming” and argues Kentucky’s tax scheme shows an intent “to privilege incumbent in-state industry.”

The lawsuit challenges three Kentucky bills, HB 757, HB 904 and HB 869, that collectively created a 14.25% tax on prediction market transaction fees and new restrictions on state-licensed gaming operators doing business with platforms that offer sports event contract trading.

The coalition argues the state tried to dress regulation as taxation. The complaint says Kentucky cannot “evade federal preemption by specifically targeting federally regulated conduct for disfavored tax treatment,” arguing the tax applies only to federally regulated exchanges and is defined by reference to federal event contract law.

The complaint also leans heavily on the difference between Kentucky’s 14.25% prediction market tax and the state’s 9.75% tax on wagers at horse tracks.

“By the Commonwealth’s reasoning, federally regulated prediction markets are akin to gambling,” the complaint says. “Yet, here, Kentucky’s tax sets a higher rate on prediction markets than for the Commonwealth’s favored incumbent industry.”

The lawsuit argues the tax reaches beyond Kentucky because it applies to Kentucky residents who trade event contracts even while outside the state. The complaint says the law “impermissibly projects Kentucky’s taxing authority beyond its borders and into every other State in which a Kentucky resident might trade.”

The coalition also argues Kentucky singled out prediction market operators without a valid basis under the state constitution. The complaint says HB 757 “does not apply to all financial transaction platforms” and that “Kentucky’s incumbent industries do not bear an equivalent burden.” It adds that the tax applies “only to the disfavored class of prediction market operators.”

The lawsuit also brought a previously low-profile prediction market industry association into public view.

Coalition for Fair Markets was formed in April 2026, McGavick said. Its purpose is to “advance the rights of participants in information and prediction markets,” and it “advocates for the legal recognition of prediction market activity as protected expression and lawful commerce, and works to eliminate regulatory barriers that suppress participation in these markets, distort price signals, or criminalize the formation and communication of probabilistic opinion.”

The Polymarket US membership is notable because Polymarket was not part of the Coalition for Prediction Markets, the separate Washington trade group launched in December by Kalshi and Crypto.com with Robinhood, Coinbase and Underdog. That group was formed to preserve access to federally supervised prediction markets as state regulators and gaming stakeholders push back against sports event contracts.

Polymarket and Kalshi are also widely viewed as each other’s biggest rivals. That rivalry spilled into public view this month, when Sportico reported on a Kalshi letter to the CFTC criticizing activity on Polymarket’s offshore platform, and the New York Post reported that Polymarket accused Kalshi of spying on its business and copying its ideas.

The coalition is seeking declaratory and injunctive relief blocking Kentucky from enforcing the challenged laws. Its claims go beyond federal preemption, also invoking the dormant Commerce Clause, which generally prohibits states from unduly burdening interstate commerce, as well as the First Amendment, Kentucky’s equal protection guarantees and the state constitution’s ban on special legislation that singles out particular groups for unique legal treatment.

The timeline gives the case some urgency. Kentucky’s restrictions on state-licensed gaming operators doing business with sports event contract platforms are scheduled to take effect July 15, while the 14.25% prediction market tax is scheduled to take effect Jan. 1, 2027.

Other states have sought to restrict prediction markets through cease-and-desist letters, enforcement actions and outright bans on certain event contracts. The Commodity Futures Trading Commission has sued several states in response, arguing those efforts interfere with its exclusive jurisdiction over federally regulated derivatives markets. 

The Kentucky case opens a different front by testing whether states can single out prediction market transaction fees for targeted taxation, even if they generally retain authority to tax businesses operating within their borders.

The complaint argues Kentucky’s approach is unprecedented, saying “no State currently levies a State-specific excise tax of any kind on derivatives transactions that take place on a federally designated exchange.”

The post Kalshi, Crypto.com and Polymarket US Sue to Block Kentucky Prediction Market Tax appeared first on DeFi Rate.

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