Kentucky has escalated its fight against prediction market platforms, filing lawsuits against Kalshi and Polymarket while simultaneously defending a controversial new tax on the industry.
Attorney General Russell Coleman announced the legal action this week, accusing the platforms of operating illegal sportsbooks without licenses. The move comes as those same companies challenge Kentucky in court over a first-of-its-kind tax on prediction market transactions.
The overlapping lawsuits set up a high-stakes legal battle that could reshape how prediction markets operate across the United States. It also comes at a time when these platforms are helping push World Cup wagers to record-setting numbers.
Kentucky Takes Aim at Prediction Markets
State officials allege that Kalshi and Polymarket are offering sports betting products without proper approval.
According to the lawsuits:
- Users can wager on game outcomes, point spreads, and player stats.
- Platforms operate without Kentucky gaming licenses.
- Some offerings closely resemble traditional sportsbook bets.
Coleman argued that the companies are attempting to bypass state law by presenting gambling products as financial tools. Minnesota lawmakers just went through a similar fight.
At the Same Time, Kentucky Is Being Sued
In a twist, Kalshi, Polymarket, and Crypto.com are also suing Kentucky over a new 14.25% tax on prediction market transaction fees.
This creates a rare legal standoff:
- Kentucky says the platforms are illegal.
- The companies say Kentucky is overstepping its authority.
That tension is likely to draw national attention as regulators and lawmakers debate how prediction markets should be treated.
Platforms Named in Kentucky Lawsuits
The state filed separate lawsuits against three groups:
- Kalshi and its affiliates, including Coinbase
- Polymarket and its affiliated entities
- VGW, which operates Chumba Casino, Global Poker, and LuckyLand Slots
According to the complaints, the platforms are offering gambling-style products without proper licensing or oversight in Kentucky. To help curb concerns, Kalshi and Polymarket recently implemented self-imposed rules they referred to as "guardrails."
Allegations Against Kalshi and Polymarket
The lawsuits claim that Kalshi and Polymarket function similarly to traditional sportsbooks.
State officials allege that users can place wagers on:
- Game winners
- Point spreads
- Player statistics
The complaint against Kalshi states that sports-related contracts made up about 70% of its trading volume during a sampled period in 2025.
Polymarket is also accused of promoting its services in a way that suggests it is legally authorized to offer sports betting in Kentucky, even though the state says it is not licensed to do so.
Attorney General Coleman was direct in his criticism, stating that both platforms are operating illegal sportsbooks in the state.
Lawsuit Targets Sweepstakes Casino Operator
A separate lawsuit targets VGW, an operator of so-called sweepstakes casinos.
According to the state:
- The platforms offer games designed to resemble slot machines and blackjack.
- Users can play with two types of virtual chips, one free and one with real cash value.
- Players can purchase “Sweeps Coins” and redeem winnings for cash.
State officials argue this system mirrors traditional gambling, even if it is structured differently.
Prediction Market Tax Dispute Adds Fuel
At the same time, Kalshi, Polymarket, and Crypto.com are part of a coalition suing Kentucky over a newly enacted tax on prediction markets.
The law imposes a 14.25% excise tax on transaction fees, making it the first state-level tax of its kind in the U.S.
The companies argue that:
- The tax unfairly targets prediction market platforms.
- It is higher than the 9.75% tax applied to horse racing wagers.
- It may violate federal law governing regulated exchanges.
Kalshi has warned that such policies could push users toward unregulated platforms with fewer protections.
What Are Prediction Markets?
Prediction markets allow users to trade contracts based on the outcome of real-world events.
These can include:
- Sports results
- Elections
- Economic trends
- Global events
Instead of placing a traditional bet, users buy and sell contracts tied to outcomes, with prices shifting based on market demand.
Supporters argue this model is closer to financial trading than gambling, while critics say it often looks and functions like sports betting.
Growing Regulatory Pressure
The legal clash in Kentucky reflects a broader national debate.
In recent months, Attorney General Coleman has joined bipartisan efforts to push for clearer regulation of prediction markets.
At the same time, the industry has faced scrutiny over integrity concerns, including cases involving the use of non-public or sensitive information to place trades.
What Comes Next
Kentucky is now both suing prediction market platforms and defending its own tax policy against them in court.
The outcome of these overlapping legal battles could shape:
- How prediction markets are classified under U.S. law
- Whether states can tax or restrict federally regulated platforms
- How users access these platforms in regulated markets
If the lawsuit succeeds, it may limit states’ ability to impose similar taxes. If it fails, other states could follow Kentucky’s lead.
