- New York state sued the popular prediction market provider known as Kalshi over allegations that it is operating an illegal gambling operation.
- 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.
- The lawsuit, filed in New York State court, seeks an order enjoining Kalshi’s operations, plus fines, restitution, and the forfeiture of profits.
- New York is taking a different approach by asking its state’s highest courts to declare the activities as sports gambling under existing state law.
- The lawsuit claims that Kalshi’s prediction markets are a form of gambling because users bet on uncertain events they cannot control.
- 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, while 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.
- The lawsuit sharpens numerous tax questions that loom larger for bettors and the providers.
New York state has initiated legal action against Kalshi, a prominent prediction market provider, claiming it operates an illegal gambling operation. The lawsuit, filed by Attorney General Letitia James, alleges that Kalshi has failed to obtain a necessary state gambling license and is evading taxes required of licensed gambling entities.1245
James stated, “New York’s gambling laws protect children from underage betting and help combat gambling addiction. No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple.” The lawsuit seeks to enjoin Kalshi’s operations, impose fines, and require the forfeiture of profits.3
Kalshi, which is regulated by the CFTC, currently pays corporate income tax at a rate of 7.25%, significantly lower than the gambling tax rate of 51% that sportsbooks like FanDuel face on their net gaming revenue. If Kalshi is classified as a gambling provider, it could face a steep tax increase, impacting its profitability.78
The lawsuit also raises concerns about underage access, as Kalshi allegedly allows users aged 18 to 20 to participate, while New York law mandates a minimum age of 21 for mobile sports betting. Kalshi's spokesperson criticized the lawsuit as political theater, asserting that it could drive users to unregulated offshore markets.
This legal battle reflects broader tensions between state and federal regulations, as Kalshi and similar platforms argue they should be governed exclusively by federal law. The outcome could set a precedent for how prediction markets are treated under U.S. law.
“The lawsuit seeks forfeiture of profits, restitution, and fines three times Kalshi's profits, and alleges 18-to-20-year-olds can bet despite New York's 21+ age limit. The CFTC warns one state could 'bring entire federally regulated markets to the brink of destruction.'”
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