Updated April 23, 2026. The legal landscape has shifted materially since Q1 2026. Two federal appeals courts have now weighed in, three new states have filed enforcement, and the CFTC has sued three states directly.
The federal-state jurisdictional split is still unresolved. The CFTC asserts exclusive authority over prediction market event contracts as swaps. State gaming commissions assert authority over sports wagering inside their borders. Two federal appeals courts have now split on the question.
Classification system (factual, not legal opinion)
The list has grown since January. Thirteen states now have active enforcement posture, litigation, or both.
Nevada Gaming Control Board issued its cease-and-desist to Kalshi in March 2025. A federal district court ruled for Nevada in November 2025. The Ninth Circuit cleared the way for Nevada’s temporary ban in March 2026. The Ninth Circuit heard oral arguments on April 16, 2026, with a panel (Judges Nelson, Bade, Lee) that appeared sympathetic to Nevada’s position. Kalshi currently cannot operate sports markets to Nevada residents.
Risk level: Extreme. Users in Nevada face material legal and operational exposure.
New Jersey Gaming Commission challenged Kalshi in early 2025. A federal district court granted Kalshi a preliminary injunction on April 28, 2025. On April 7, 2026, the Third Circuit affirmed that injunction in a 2-1 decision. The majority held that sports event contracts fall within the swap definition in the Commodity Exchange Act. Judge Jane Richards Roth dissented, calling Kalshi’s offerings “virtually indistinguishable” from DraftKings and FanDuel.
Risk level: Low for Kalshi users. Federal preemption recognized by the first appellate ruling.
Maryland Gaming Commission challenged Kalshi. Federal Judge Adam B. Abelson denied Kalshi’s preliminary injunction request on August 1, 2025. The court found state gaming authority can coexist with CFTC regulation. The Third Circuit ruling does not bind Maryland (Fourth Circuit jurisdiction). Maryland continues enforcement.
Risk level: High. State authority recognized by the federal court.
Tennessee Sports Wagering Council sent cease-and-desist letters to Kalshi, Polymarket, and Crypto.com in late 2025. Kalshi sued on January 9, 2026. Judge Aleta Trauger granted a TRO three days later. On February 19, 2026, Judge Trauger converted the TRO to a preliminary injunction. The court held that Kalshi is likely to succeed on the merits because sports event contracts are swaps.
Risk level: Low for Kalshi users. State enforcement blocked by the preliminary injunction.
Connecticut Department of Consumer Protection issued cease-and-desist orders on December 3, 2025, to Kalshi, Polymarket, and Crypto.com. The CFTC sued Connecticut on April 2, 2026, in the District of Connecticut. The CFTC seeks a declaratory judgment and a permanent injunction blocking state enforcement.
Risk level: Medium. Active federal litigation; state enforcement ongoing but challenged.
Arizona filed a 20-count criminal information against Kalshi on March 17, 2026. The charges allege illegal gambling operation and election wagering. The CFTC sued Arizona on April 2, 2026, seeking to block criminal enforcement. On April 10, 2026, a federal judge halted the state’s case. The CFTC won a temporary restraining order against Arizona’s criminal prosecution.
Risk level: Medium-high. Criminal exposure paused; situation still active.
Illinois Gaming Board sent cease-and-desist letters since April 2025 to more than a dozen operators, including Kalshi, Polymarket, Robinhood, and Crypto.com. Governor J.B. Pritzker signed an executive order in 2026 barring state employees from using insider information on prediction markets. The CFTC sued Illinois in the Northern District of Illinois on April 2, 2026.
Risk level: Medium. Federal litigation pending; state enforcement contested.
Michigan Attorney General Dana Nessel filed a civil enforcement action against Kalshi on March 4, 2026. The suit seeks a permanent injunction against Kalshi’s sports contracts in Michigan. Polymarket filed a preemptive federal suit against Michigan within 24 hours in the Western District of Michigan.
Risk level: Medium. Active parallel litigation; no operational block yet.
A Massachusetts state judge ordered Kalshi to block users in early 2026. The judge paused that order pending Kalshi’s appeal. Polymarket already blocks Massachusetts IP addresses.
Risk level: Medium. Operational block paused on appeal; access remains uncertain.
Ohio Casino Control Commission sent early cease-and-desist letters to Kalshi and other operators. Ohio has not escalated to litigation as of April 2026.
Risk level: Medium. Active enforcement posture; no court challenge yet.
Regulatory History: Polymarket agreed to a CFTC settlement in January 2022 and restricted U.S. user access. The platform remained operational globally but geoblocked U.S. IP addresses.
U.S. Return (2026): Polymarket acquired QCEX LLC (a CFTC-licensed Designated Contract Market and derivatives clearing organization) on July 21, 2025 for $112 million. This acquisition provides Polymarket with a regulated pathway to offer contracts to U.S. users. CFTC actions have facilitated steps toward U.S. market re-entry, though specific rollout timing and state-by-state availability remain in development.
Current Status: Limited access phase. Polymarket has announced plans to return to the U.S. market via a regulated structure, but full nationwide availability is not yet live. Traders interested in Polymarket should monitor official announcements for updates on access.
Valuation & Backing: Intercontinental Exchange (ICE, parent of NYSE) invested up to $2 billion in Polymarket (October 2025), valuing the company at approximately $8 billion pre-investment.
Media Coverage: Polymarket odds and data appear on major financial news platforms (e.g., Google Finance, Yahoo Finance), though these represent carried content rather than formal institutional partnerships.
VPN Access Warning: Accessing the international Polymarket platform from restricted jurisdictions using a VPN may violate Polymarket’s Terms of Service. Using a VPN to bypass geofencing creates account risk. Polymarket applies geofencing and KYC checks that can flag suspicious activity. Users are advised to wait for official U.S. re-entry rather than circumvent restrictions.
Key Authority: CFTC filings; Polymarket official announcements; ICE/Reuters/FT coverage of investment and acquisition.
Regulatory Status: Crypto.com holds Money Transmitter Licenses in multiple states. The company has not yet obtained CFTC approval as a Designated Contract Market (unlike Kalshi or Polymarket’s QCEX pathway).
State Actions: Connecticut and Tennessee have issued cease-and-desist orders to Crypto.com alongside orders to Kalshi and Polymarket (December 2025 and January 2026).
2026 Outlook: Crypto.com’s path to prediction market expansion remains in development. The company may pursue state-by-state partnerships and regulatory approaches, but no confirmed national rollout has been announced with clear timelines.
Key Authority: Connecticut Department of Consumer Protection press release (December 3, 2025); Tennessee state action filing (January 2026).
As of April 23, 2026, the following major states have not taken formal action against prediction market platforms.
California has issued no formal cease-and-desist. Two frictions remain. First, California prohibits sports betting entirely, creating direct conflict with sports event contracts. Second, California’s Digital Financial Assets Law (DFAL) takes effect July 1, 2026. DFAL requires digital asset service providers to hold DFPI licenses. Prediction markets may fall within DFAL scope depending on DFPI interpretation.
Risk level: Medium. Future compliance friction likely post-July 2026.
Texas has no legal sports betting as of April 2026. No documented formal state action against prediction markets. Kalshi operates in Texas. Risk is low but unresolved.
Florida permits sports betting through a tribal compact. No documented formal state action against prediction markets. Kalshi and Polymarket operate in Florida.
New York Department of Financial Services has issued no formal cease-and-desist. A class action lawsuit against Kalshi was filed in November 2025, alleging deceptive trading practices. DFS may impose BitLicense or limited purpose trust company charter requirements on digital asset activity.
Risk level: Medium. Private litigation active; state regulatory friction possible.
Alabama, Alaska, Arkansas, Colorado, Delaware, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. No documented formal state action as of April 23, 2026.
This list is fluid. States issue enforcement actions monthly. Verify current status before trading.
Nevada Gaming Control Board issued its cease-and-desist in March 2025. A federal court ruled for Nevada in November 2025. The Ninth Circuit allowed Nevada’s temporary ban to take effect in March 2026. The appeals court heard oral arguments on April 16, 2026, with the panel (all Trump appointees from the first term) appearing receptive to Nevada’s position. A ruling for Nevada would create a circuit split with the Third Circuit. That split would accelerate a Supreme Court review.
Key authority: Nevada Current, Bloomberg Law, CoinDesk (March-April 2026).
Judge Adam B. Abelson denied Kalshi’s preliminary injunction on August 1, 2025. The court held that CFTC field preemption does not automatically override state gambling laws. The Third Circuit ruling does not bind Maryland. Maryland continues enforcement.
Arizona filed 20 criminal counts against Kalshi on March 17, 2026. The CFTC won a temporary restraining order on April 10, 2026, blocking the criminal case. The CFTC civil suit against Arizona seeks a permanent injunction.
California’s Digital Financial Assets Law takes effect July 1, 2026. The California Department of Financial Protection and Innovation will determine whether prediction market contracts qualify as digital financial assets. Classification would trigger licensing, capital standards, and audit requirements for operators serving California residents.
Key authority: California AB 39 and SB 401; Governor Newsom’s compliance extension under AB 1934.
The CFTC filed simultaneous complaints in the Northern District of Illinois, District of Connecticut, and District of Arizona on April 2, 2026. The CFTC seeks declaratory judgments that federal law preempts state enforcement. Permanent injunctions are requested against all three states.
Key authority: CFTC press releases 9206-26 and 9208-26 (April 2026); Washington Post, CNBC, ESPN coverage.
Michigan AG Dana Nessel sued Kalshi on March 4, 2026. Polymarket filed its own federal suit against Michigan within 24 hours. Both actions remain active.
A Massachusetts state judge ordered Kalshi to block state users. The block is paused pending Kalshi’s appeal. Polymarket continues to block Massachusetts access.
The Internal Revenue Service has issued no formal guidance on prediction market tax classification as of April 23, 2026. The classification question remains disputed. Tax professionals expect formal guidance in late 2026 or 2027, though this is not confirmed.
Kalshi’s 2025 tax documentation confirms the platform’s actual reporting practice.
Kalshi does not issue a 1099-B for event contract trades. Traders must self-report gains and losses on every trade. Polymarket traders self-report without any 1099 documentation.
Source: Kalshi tax documentation (2026 tax year); Keeper Tax, Camuso CPA analyses.
The One Big Beautiful Bill Act was signed on July 4, 2025. The law caps gambling loss deductions at 90% of gambling winnings for tax year 2026. A breakeven trader with $10,000 in gains and $10,000 in losses can deduct only $9,000. The trader owes tax on $1,000 of phantom income. This cap applies only if prediction market earnings qualify as gambling income. That classification is exactly the disputed question.
Treatment 1: Ordinary income. Report gains at ordinary income rates (up to 37% federal plus state). If the IRS later classifies earnings as gambling, the 90% loss cap applies retroactively. Highest tax liability.
Treatment 2: Section 1256 contracts. Section 1256 treatment produces a 60/40 split: 60% long-term capital gain (0-20% federal), 40% short-term capital gain (ordinary rates). Blended rate falls between 15% and 25%. Kalshi’s CFTC Designated Contract Market status makes it the strongest Section 1256 candidate. The IRS has not confirmed qualification. Dodd-Frank Section 1256(b)(2)(B) excludes swaps from Section 1256 treatment, which creates direct conflict with the Third Circuit’s holding that sports event contracts are swaps.
Treatment 3: Gambling income. Taxed at ordinary rates. Subject to the 90% loss deduction cap. Highest audit probability. Worst-case classification.
Tax uncertainty remains the single biggest unresolved risk for U.S. prediction market traders.
Learn more about Kalshi and Polymarket tax filing mechanics on Lines.com.
A simple decision framework based on residence state and risk tolerance.
Yes (Nevada, Maryland, Arizona, Illinois, Michigan, Massachusetts, Ohio, Connecticut): Legal risk is material. The Ninth Circuit decision (expected mid-2026) will clarify the Nevada posture. Wait for Ninth Circuit and Supreme Court clarity before trading sports contracts.
No: Continue to Question 2.
California: Wait for DFAL clarification (July 1, 2026). Avoid sports contracts. Non-sports markets may still be accessible.
New York: Kalshi class action litigation pending. Expect possible BitLicense friction. Proceed with caution.
Texas, Florida, Georgia, and other no-action states: Proceed with moderate caution. Monitor for state enforcement signals monthly.
No: Do not trade yet. IRS guidance is 12 to 24 months away. Back-tax liability risk is real if the IRS classifies earnings differently than you file.
Yes (you have a CPA, track detailed records, accept reclassification risk): Proceed.
Lower risk profile. You live outside the 10 documented enforcement states. You use a CFTC-regulated Designated Contract Market (Kalshi, Polymarket via QCEX, Gemini Titan). You have a CPA and can document trade history. You accept that IRS guidance may retroactively change your tax position.
Higher risk profile. You live in Nevada, Maryland, Arizona, Illinois, Michigan, Massachusetts, Ohio, or Connecticut. You plan sports-contract trading in California. You cannot manage tax classification uncertainty. You use an unregulated offshore platform.
CFTC Chairman Michael Selig was confirmed in December 2025. Under Chairman Selig, the CFTC has adopted an active posture in defense of its jurisdiction. The CFTC dropped its appeal of the Kalshi election markets case in May 2025. The CFTC approved Polymarket’s QCEX acquisition pathway and Gemini Titan DCM in December 2025. The CFTC sued Arizona, Connecticut, and Illinois on April 2, 2026, seeking permanent injunctions against state enforcement.
Sources: CFTC press releases 9206-26 and 9208-26; Congress.gov; Reuters.
A circuit split between the Third and Ninth Circuits would create the conditions for a Supreme Court cert grant. Prediction market traders price a 64% probability that SCOTUS accepts a sports event contract case by year-end 2026.
Ten states have formal action. Three face federal countersuits. Nevada’s ban is in effect. Tennessee’s ban is blocked by federal injunction. Michigan, Arizona, Illinois, Connecticut, and Massachusetts are in active litigation. The enforcement posture is expanding faster than any single year in prediction market history.
Your residence state determines your risk exposure more than the platform you choose. The Third Circuit win for Kalshi is the first appellate federal preemption ruling, but it binds only Pennsylvania, New Jersey, and Delaware. The Ninth Circuit ruling expected this summer will likely decide whether the Supreme Court hears the case this year. If you live in a no-action state and you can tolerate tax classification uncertainty, you can trade Kalshi or Polymarket today. If you live in Nevada, Arizona, or Michigan, wait for circuit-level clarity. Check Lines.com for weekly state-status updates and market-implied probabilities on the SCOTUS docket decision.
Depends on your state. Kalshi operates in 42 states as of April 2026. Nevada, Maryland, Arizona, Illinois, Michigan, Massachusetts, Ohio, Connecticut, Tennessee, and New Jersey have active state challenges at varying stages. Tennessee, New Jersey, and Arizona enforcement is currently blocked by federal courts.
No. The Third Circuit ruling binds only the three states in its circuit. The Ninth Circuit is expected to rule soon on Nevada’s appeal. A split ruling would likely go to the Supreme Court.
The IRS has issued no formal guidance. Kalshi does not issue 1099-B forms for event contract trades. Most tax professionals treat gains as ordinary income or Section 1256 contracts. The classification dispute is unresolved.
Only if the IRS classifies earnings as gambling income. The cap is effective January 1, 2026. Tax professionals currently disagree on whether prediction market earnings meet the gambling definition.
Yes, in most states. Polymarket operates through its QCEX acquisition under CFTC oversight. Polymarket blocks Massachusetts, Illinois, and several other states as of April 2026.
A SCOTUS ruling would likely settle the federal-state preemption question. Prediction market traders price 64% probability the court accepts a case by year-end 2026. A decision could follow 6 to 18 months later.
Crypto.com’s Ninth Circuit appeal is pending. Nevada, Connecticut, and Tennessee cease-and-desist orders remain. Access is limited pending appellate clarity.
If you live in an active-enforcement state, yes. If you live in a no-action state and you can track trades for tax purposes, current access is legal under federal preemption arguments the Third Circuit has now affirmed.
Track prediction market odds, state regulatory updates, and SCOTUS docket probabilities on Lines.com.
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