The biggest story in US betting in 2026 is not a sportsbook. It is the prediction market. Platforms like Kalshi, Polymarket, and the sportsbook-run exchanges from DraftKings and FanDuel now trade an estimated $24 billion a month, a figure that rivals or exceeds regulated sportsbook handle in a given month. And they do it in all 50 states, including the dozen with no legal sportsbook, because they are regulated as commodities exchanges by the federal Commodity Futures Trading Commission rather than as gambling by the states.
That is the whole fight in one sentence. A sports event contract (will Team X win, yes or no) looks and feels like a bet, but its operators argue it is a federally regulated financial instrument, not gambling. If they are right, state gaming laws, licenses, and tax rates simply do not apply. States that spent years building a licensed, taxed sportsbook industry now watch a parallel market take sports-style action out of the same wallets while paying them nothing. In 2026 they moved to change that.
The argument at the center of it
Kalshi has been the test case. Its position is that event contracts are economically similar to commodity futures and fall under the exclusive jurisdiction of the CFTC, so any state that tries to license, tax, or ban them is violating the Supremacy Clause of the US Constitution. In other words: this is federal turf, and states cannot touch it. The counterargument from state regulators is blunt: if it accepts money on the outcome of a game, it is sports betting, and it has to follow the same rules as everyone else.
That question is now headed through the courts, and the outcome will shape the entire market. Until a higher court settles the preemption issue, the country is a patchwork of conflicting moves.
The crackdown: bans, charges, and lawsuits
The hard-line states have gone after the operators directly. Arizona has filed criminal charges against Kalshi. Nevada and Michigan moved to ban the sports contracts outright. Illinois went furthest of all: Senate Bill 3019 does not just tax prediction markets, it requires them to hold a state sports betting license (a $15 million initial fee for four years, plus a $1 million renewal) and pay a wagering tax of 1.75% on the first 5 million sports contracts a year and 3.5% after that, all effective July 1, 2026. The Illinois Gaming Board sent cease-and-desist letters to Kalshi and Polymarket, and Kalshi sued, asking a federal court for an emergency restraining order to block the rules before the July 1 deadline exposes it to criminal penalties.
The other path: tax it, do not ban it
A second group of states has taken the pragmatic route, writing prediction markets into the tax code rather than trying to outlaw them. North Carolina, in a budget finalized June 30, raised its online sportsbook tax from 18% to 23% and, for the first time, imposed a 6% tax on prediction markets effective January 1, 2027, while explicitly letting CFTC-registered platforms operate without a state license. Kentucky got there first, enacting a 14.25% excise tax on prediction-market transaction fees back in April, the first state in the country to tax the product beyond ordinary corporate income tax. And in New Jersey, the birthplace of legal US sports betting, Democrats have introduced a bill to tax prediction markets too.
The tax-it camp is making a quiet bet of its own: that the CFTC-preemption argument may hold up in court, in which case a ban would be struck down but a reasonable tax might survive. It also captures revenue now instead of waiting years for a ruling.
A bettor problem nobody has solved: how are winnings taxed?
There is a second, quieter mess underneath the state fight: the IRS has not clearly said how prediction-market winnings should be reported. Because the contracts are structured as financial instruments, it is unclear whether a winning sports contract is taxed like gambling winnings or like a capital gain, which carry very different rules and paperwork. With the World Cup driving record volume onto these platforms, a lot of people are about to have gains they do not know how to report. Treat any winnings as taxable and keep records; do not assume the platform will send you a familiar gambling tax form.
Our take
This is the defining structural fight of US betting right now, bigger than any single state legalization. The economics are impossible to ignore: a product that takes sports-style action in all 50 states while paying little or no state tax is going to draw exactly this response. Our read is that the tax-and-tolerate model (North Carolina, Kentucky, New Jersey) is the more durable one, because it survives whichever way the preemption question breaks, while the outright bans (Nevada, Michigan) and criminal cases (Arizona, Illinois) are riding on a legal theory that a federal court has yet to bless.
For bettors, the practical picture is mixed. Prediction markets are, for now, the only functional sports-wagering option in California, Texas, Florida, and Georgia, and they are not going away. But the ground is unstable: access, pricing, and even legality can change state by state on short notice, and the tax treatment of your winnings is genuinely unresolved. Use them with eyes open, and keep good records. We are tracking the litigation and the state bills as they move.