Prediction Markets Leave States Short More Than $1 Billion in Tax Revenue

The American Gaming Association has released figures showing U.S. states have missed out on more than $1 billion in tax revenue because prediction market platforms have expanded rapidly while operating outside traditional gaming tax structures. These platforms function in ways that resemble sports betting yet fall under different regulatory categories, which means they avoid the taxes that licensed operators must pay. The development comes as legal sports betting continues to grow across multiple states, creating clear contrasts between fully regulated markets and these alternative systems. Data from the association points directly to platforms such as Polymarket and Kalshi as central to the shortfall. Observers note that these sites allow users to trade contracts on election outcomes, sports results, and other events, and the activity often mirrors the structure of sports wagers. Because the platforms do not hold state gaming licenses in most jurisdictions, they do not contribute to the tax pools that fund public services in states where sports betting has been legalized.

Scale of the Revenue Gap

The $1 billion figure represents cumulative losses across states that have authorized sports betting since the 2018 Supreme Court decision opened the door to broader legalization. Figures reveal that the gap has widened steadily as prediction markets gained users, particularly around high-profile events where betting interest spikes. States with mature sports betting markets have seen the largest shortfalls because those jurisdictions already collect substantial taxes from licensed operators, yet prediction platforms capture a share of the same customer activity without matching contributions.

Analysts tracking the sector point out that prediction markets often market themselves as financial or information tools rather than gambling products. This framing allows them to operate under lighter oversight in many cases, which in turn limits the tax obligations they face. teh American Gaming Association has highlighted this distinction in recent statements, emphasizing how the arrangement creates an uneven competitive field between regulated companies and these emerging platforms.

Regulatory Tensions in May 2026

By May 2026 the issue had become a focal point for state regulators and industry groups alike. Several states had already moved to clarify rules around event contracts and prediction trading, yet enforcement remains inconsistent across borders. Licensed operators continue to argue that the current setup disadvantages them because they must comply with strict advertising limits, responsible gaming requirements, and tax rates that can reach double digits on gross gaming revenue, while prediction platforms face fewer such constraints.

State officials have responded in different ways. Some legislatures have introduced bills that would bring prediction platforms under existing gaming tax regimes, while others have focused on enforcement actions against specific contracts tied to sporting events. The pattern shows that states with larger sports betting markets tend to feel the revenue pressure more acutely, prompting faster policy responses.

Comparison With Licensed Operators

Licensed sportsbooks pay taxes that support state budgets directly, often through frameworks that allocate portions to education, public safety, and problem gambling programs. Prediction markets, by contrast, typically route revenue through different channels or retain more of it internally. Those who have studied the market note that this difference becomes especially visible during major sporting events when both types of platforms see heavy volume, yet only one side contributes to the state tax base.

The American Gaming Association has compiled its estimate using data on trading volumes and comparable tax rates from regulated markets. While exact methodologies vary, the core claim remains consistent: activity that looks and functions like sports betting generates no equivalent tax return when it occurs on prediction platforms. This situation has prompted discussions among state attorneys general and gaming commissions about how to close the gap without stifling innovation in financial products.

Industry Response and Ongoing Developments

Representatives from prediction market companies maintain that their products differ fundamentally from traditional sports betting because they involve contract trading rather than direct wagers against the house. Regulators and industry observers continue to examine whether those distinctions justify the current tax treatment. In the meantime, states that rely on gaming revenue for budget planning have begun factoring potential shortfalls into their projections.

One study revealed that trading activity on major prediction platforms has grown significantly since 2024, coinciding with increased public interest in both elections and sports. That growth trajectory suggests the revenue gap could widen further unless policy adjustments occur. States that have not yet legalized sports betting face a different calculation, because they collect no tax from either side and therefore see less immediate pressure to act.

Conclusion

The American Gaming Association estimate underscores a widening divide between regulated and unregulated or lightly regulated platforms in the U.S. gambling landscape. As prediction markets continue to attract users with contracts tied to sports and other events, states stand to lose additional tax revenue that licensed operators would otherwise generate. Policymakers now face decisions about whether to align tax treatment across these platforms or maintain the current distinctions. The outcome will shape how sports betting markets evolve through the remainder of 2026 and beyond, particularly in states that depend on gaming taxes to balance their budgets.