Inside The Billion-Dollar Battle To Tax Your Predictions

When you take a position on the next Oscar winner for Best Actor or the Super Bowl MVP, who sets the rules and governs the contract? Prediction markets, also known as outcome markets, are regulated by the U.S. Commodity Futures Trading Commission (CFTC), which oversees commodity futures and “swaps” markets at the federal level. States looking to extract fees or shut it down entirely believe their sports gambling statutes and regulators are the key factor shaping the industry — they are wrong.

Last Friday, a federal judge in Illinois ruled in favor of Kalshi, Coinbase, and the CFTC, blocking the state from enforcing its existing sports gambling rules on outcome-based sports event contracts. The court determined that Illinois cannot usurp authority and shoehorn prediction markets, even those based on sports events, into its licensing regime because the CFTC is the ultimate regulator of swaps under federal law.

Though the injunction remains in place in Illinois, other courts have not settled the question. A lawsuit ruling the opposite in Wisconsin awaits judgment at the Seventh Circuit Court of Appeals, and half a dozen more remain in limbo.

This is an important battle to have, not just because of the money at stake or the question of who the ultimate “cop on the beat” is, but because outcome markets have already become normalized.

Millions of consumers are already plugged into outcome markets as ordinary tools for finance, investing, and information-gathering. Nearly every major media outlet has partnerships with prediction markets, which are used predominantly to track investor sentiment on political races or polling.

The technology is already integrated into mainstream finance applications, and financial news networks regularly cite its markets to gauge opinion.

CFTC Chair Mike Selig, for his part, has been unequivocal that outcome markets are “swaps,” placing them within his agency’s jurisdiction to police. “The CFTC has exclusive regulatory authority when it comes to commodity derivatives markets,” he said at a cryptocurrency conference in April. Since then, his agency has filed nine lawsuits against states to “reaffirm” its exclusive jurisdiction over outcome markets and quash their attempts to regulate them at the state level, often with severe penalties.

The most egregious example to date is a March criminal lawsuit filed against Kalshi by the attorney general of Arizona, alleging the New York-based company is running an “illegal gambling business in Arizona without a license.” The CFTC won an order from a federal judge to freeze the criminal charges in April, avoiding what Selig declared a “dangerous precedent” of states using criminal statutes to pursue federally regulated entities.

Though outcome markets are lumped together with sports gambling websites, they clearly offer something different to users and observers. When users trade on outcomes, using whatever knowledge they have, they make transparent predictions about what they have reason to believe will happen. This is a useful data point that goes far beyond psychology or mere feeling, matching risk appetite with useful knowledge.

It’s no wonder academia birthed the idea of prediction markets, often used as a more useful measure for determining the outcome of political races. The Iowa Electronic Markets, for example, predicted the winner of every major presidential race between 1988 and 2004, based on the thesis that voters with some “skin in the game” would be more correct than voters polled primarily on their sentiments.

Despite this, how to regulate these markets is less clear than who wants to regulate them. Whether on insider trading, age limits, or how to combat addiction, outcome markets are a nascent territory for courts and regulators. States want to control and capture value based on how they approach sports gambling, while the federal government wants to give more breathing room to an innovative information-trading model while still upholding its police authority.

The CFTC has more experience and authority to address these novel questions and is proving more flexible in accommodating them. The states, by contrast, are happy to shoehorn these markets into existing sports gambling regulation, which promises excessive taxes, user restrictions, and 50 different markets for Americans trading on outcomes. Illinois’ desire to tax these platforms by $880 million makes this all the more transparent.

Users and observers of these markets understand their utility and worth, as do the CFTC and the Trump administration. States, however, see prediction markets as the next activity to tax, regulate, and control. They’re counting on a payday.

Viewed this way, it’s clear the CFTC has the better argument.

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Yaël Ossowski is the deputy director of the Consumer Choice Center.

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