Prediction Markets Shift Tax Landscape as States and Tribes Face Over $1 Billion Shortfall in Sports Betting Revenue

The American Gaming Association has put forward an estimate showing that U.S. states and tribes have missed out on more than $1 billion in tax revenue from sports betting because prediction markets such as Kalshi and Polymarket have grown under separate regulatory structures that do not apply traditional gambling taxes. This development comes amid rising volumes in event contracts and ongoing questions about how these platforms fit into existing frameworks for taxation and oversight.

According to the association's figures, the revenue gap stems directly from the way prediction markets handle contracts tied to sports and other events without falling under state-level sports betting regulations. Traditional sportsbooks pay taxes on handle and revenue in most jurisdictions, yet platforms operating as prediction markets avoid those obligations through their classification as commodity or event contract venues. The distinction has allowed these markets to expand while states and tribes collect less than they would from equivalent activity channeled through licensed sports betting operations.

Regulatory Classification Drives the Revenue Gap

Prediction markets function through event contracts that settle based on outcomes, and regulators have treated many of these products under frameworks separate from gambling statutes. Kalshi and Polymarket operate with this approach, which means they do not contribute to the tax pools that support state budgets and tribal gaming operations. Data from the American Gaming Association indicates that the cumulative effect has already exceeded $1 billion in forgone collections as trading volumes in sports-related contracts have increased.

States and tribes rely on sports betting taxes to fund public services and gaming-related programs, and the shift toward prediction markets alters that flow. Observers note that the same underlying activity produces different fiscal results depending on whether it occurs inside or outside the traditional regulatory perimeter. The association's estimate highlights how classification decisions at the federal and platform level influence state-level collections without requiring changes in consumer behavior.

Event Contract Volumes Continue Upward Trend

Trading activity on prediction market platforms has grown steadily, particularly in contracts linked to sports results and other verifiable events. This expansion occurs while these venues remain outside the tax structures that apply to licensed sportsbooks. The American Gaming Association connects the revenue shortfall directly to this growth pattern, noting that each dollar directed through prediction markets rather than regulated sports betting represents a reduction in potential tax receipts for states and tribes.

Because prediction markets clear contracts through different mechanisms, they do not generate the same per-transaction or revenue-based payments that states collect from sportsbooks. The association's analysis shows that the total missed amount surpasses $1 billion when aggregated across jurisdictions that have authorized sports betting. This figure reflects the scale of activity that has moved outside the taxed channel rather than an overall decline in interest in sports outcomes.

Industry Discussions Focus on Framework Alignment

Industry participants and regulators continue to examine how prediction markets and traditional sports betting should coexist under consistent rules. The American Gaming Association has presented its estimate as part of broader conversations about taxation, consumer protections, and competitive balance. Platforms such as Kalshi and Polymarket maintain that their event contracts fall under existing federal authority for prediction products, while state and tribal interests point to the fiscal impact of that separation.

The $1 billion shortfall estimate underscores how regulatory boundaries affect revenue distribution even as overall market participation grows. Those who have reviewed the association's data note that teh same event outcomes can be traded in multiple venues, yet only certain venues feed into state tax systems. This structural difference remains central to discussions about whether additional alignment or clarification is needed.

Conclusion

The American Gaming Association's estimate of more than $1 billion in missed tax revenue illustrates the direct connection between platform classification and state collections. Prediction markets such as Kalshi and Polymarket continue to operate under frameworks that do not impose traditional gambling taxes, and the resulting gap affects both states and tribes that depend on sports betting proceeds. As event contract volumes rise, the association's figures provide a concrete measure of the fiscal consequences tied to current regulatory distinctions.