RESOLVING THE LEDGER
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Taxes The Tax Reasons For New York To Treat Kalshi Like A Sportsbook By Nathan Goldman ,
Forbes contributors publish independent expert analyses and insights. Nathan Goldman is a tax prof. at NC State Univ. Follow Author Jul 31, 2026, 11:35am EDT Jul 31, 2026, 11:40am EDT --:-- / --:-- This voice experience is generated by AI. Learn more . This voice experience is generated by AI. Learn more . Summary New York State has initiated a lawsuit against prediction market Kalshi, asserting it operates an illegal gambling enterprise. Attorney General Letitia James argues Kalshi's activities constitute gambling, requiring regulation by the State Gaming Commission, not just corporate income tax. This legal action stems from a substantial tax disparity: licensed gambling operators face high tax rates on net gaming revenue, while CFTC-regulated Kalshi pays a much lower corporate rate on its fees. New York aims to legally reclassify these operations as gambling, which would drastically increase Kalshi's tax obligations and significantly impact its profitability. This case could also establish a crucial precedent for federal tax treatment and regulatory clarity for prediction markets nationwide, addressing widespread market uncertainty for both providers and users.
New York state sued the popular prediction market provider known as Kalshi over allegations that it is operating an illegal gambling operation. In their case that was brought to the Supreme Court of the State of New York , Attorney General Letitia James alleges that prediction market operations, such as Kalshi’s operation, are a form of gambling and that not registering with the New York State Gaming Commission is a breach of the state’s laws.
At the center of these allegations are clear tax incentives for New York to file this lawsuit. Prediction markets pay the corporate income tax rate for taxable income earned in that state. Meanwhile, gambling providers must pay a gambling tax rate on net gaming revenue, which often dwarfs the size of the corporate income tax rate.
If Kalshi were to be considered a gambling provider, it would potentially face a steep increase in taxes owed.
Prediction markets and licensed sportsbooks can accept functionally identical bets on the same sporting event, yet face different tax treatment. A sportsbook like FanDuel pays New York’s gaming tax on its net gaming revenue (money from wagers won less money from wagers lost). Meanwhile, Kalshi, which is regulated under the CFTC, is not subject to these requirements and, instead, must follow general corporate income tax rules.
To demonstrate, consider two taxpayers who each wager $110 to win $100 on the opposite side of a sports outcome. For a company like FanDuel, they are all but guaranteed to have $10 in net gaming revenue. In the state of New York, this net gaming revenue will be subject to a 51% tax rate, meaning that FanDuel will have less than half of this $10 in after-tax income.
Conversely, the same $110 wagers can be placed on opposite sides of a prediction via Kalshi. In this case, Kalshi will take a cut of each prediction, resulting in approximately $10 of fees. However, for Kalshi, it will be subject to corporate income taxes in New York, which are taxed at a 7.25% rate. Thus, for the same wagers, Kalshi will have over 90% of the $10 in after-tax income.
The rise of prediction markets has affected the budgets of states like New York more than others. The prediction market tax wedge in New York is among the highest of all states that have legalized sports gambling, meaning that there are clear incentives for the state to argue that these sports bets placed on prediction markets should be subject to the same tax laws as sports bets placed with licensed gambling operators.
States taking action with regard to prediction markets have recently been a hot topic among state legislators. For example, North Carolina has attempted to close this tax wedge by taxing prediction providers more directly (akin to a net gaming revenue-like tax). However, in doing so, it has effectively also legalized prediction markets in its state via legislative action.
New York is taking a different approach. Rather than trying to shrink this tax wedge, it is asking its state’s highest courts to declare the activities as sports gambling under existing state law, according to CNBC . If successful, the wedge does not narrow; it disappears.
As it impacts the above example, FanDuel’s taxes would remain unchanged. However, Kalshi would not face the same tax consequences as the gambling providers. Thus, rather than taking home over 90% of the wagering revenues in after-tax income, those profits would be cut almost in half, significantly impacting their bottom line.
The New York state lawsuit does not resolve the numerous tax questions that loom larger for bettors and the providers. Instead, this lawsuit sharpens those questions.
If Kalshi’s sports contracts are considered gambling under New York law, it would hand the federal authorities a blueprint for how to consider this type of income when assessing income taxes. Furthermore, it could form the framework for the U.S. Congress to formulate a concrete set of federal rules.
The desire for this uncertainty to be resolved has been felt throughout the marketplace. For instance, according to CNBC , many bettors still desire a clearer understanding as to whether their prediction market activities can be classified as Section 1256 contracts, which would provide a more favorable tax treatment.
On the provider side, due to the ambiguity of the tax laws over these activities, it is unclear what data needs to be tracked or what tax forms need to be issued to their users.
These issues are boiling over as the effects of the One Big Beautiful Bill Act hit sports gamblers, where they will now only be able to deduct 90% of gambling losses as an itemized deduction. Given that the more limited deductions will only impact sports gambling an...
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