Kentucky is set to become the first U.S. state to impose an excise tax on prediction markets. More specifically, under House Bill 757, from January 1, 2027, Kentucky will introduce a new excise tax on operators of prediction markets. The tax applies to businesses operating platforms that allow consumers to trade event contracts or take speculative positions on the outcomes of future events, such as Kalshi and Polymarket.

New Excise Tax Compliance Rules

Kentucky law defines prediction markets broadly to include both physical and electronic platforms, regardless of whether the market operator is located inside or outside the state. Essentially, this includes any platform that enables consumers to buy, sell, or exchange event contracts or open speculative positions on the outcomes of future events. 

A prediction market operator is defined as any board of trade or other person, including affiliates, that operates a prediction market. The definition extends beyond the direct operator of the market to entities that own, operate, or control digital distribution services, online platforms, portals, or application stores through which consumers can access prediction markets. As a result, the tax may apply not only to traditional market operators but also to certain technology platforms facilitating access to prediction market services.

As a result of such a broad definition, both in-state and out-of-state prediction market operators serving Kentucky customers may be subject to the new 14.25% excise tax. The excise tax applies to transaction fees, meaning any amount charged or paid in connection with a consumer’s participation in a prediction market. This includes fees charged by a prediction market operator to facilitate the sale, purchase, or exchange of an event contract, and the amount a consumer pays to acquire an event contract directly from the operator.

The tax amount must be calculated using the accrual method of accounting, meaning operators must report taxable fees when they are earned, regardless of when payment is received. Taxes are due monthly, with prediction market operators required to remit the tax to the Department of Revenue by the 20th day of the following calendar month. Each payment must be submitted together with a tax return. Those who fail to comply with the new tax obligations will be subject to the standard civil penalties established under Kentucky law.

Industry Pushback

While Kentucky plans to become the first US state to introduce an excise tax on prediction markets, industry leaders are not willing to surrender without a fight. A coalition including Kalshi, Crypto.com, and Polymarket has filed a lawsuit against the law, arguing it unfairly targets federally regulated markets and could discourage participation in legal platforms. The lawsuit's outcome could set a precedent for other states weighing similar taxes.