Prediction Markets Under Fire: New York Debates Taxes and Regulation

The debate over the regulation and taxation of prediction markets reached a new peak in August 2026. At the heart of the matter is the legal fight between federally regulated platforms offering contracts on sporting events and US states that classify these exchanges as illegal sportsbooks. The situation is particularly tense in New York, where the state is seeking $36 billion in a lawsuit against the operator Kalshi. Experts discussed the implications of this development at the Racing and Gaming Conference in Saratoga Springs, noting that the line between financial market products and gambling is increasingly blurred.

Former government aide Katie Neer, who served under ex-Governor Andrew Cuomo, openly advocates for taxing these markets. She suspects that New York has hesitated so far to avoid legitimizing the activities while massive legal battles are pending. However, Neer emphasized that the state should start capturing tax revenue rather than leaving the field to illegal or unregulated actors. This stance mirrors a broader trend where governments seek to utilize the digital transformation of the gambling sector for the public good, such as education and addiction prevention.

Numbers and facts

Before the lawsuit was filed, Kalshi had proposed a 6 percent tax on its trades to the state of New York. The company projected that this would generate approximately $10 billion in revenue over five years. However, Chelsea Davis, deputy secretary for gaming under Governor Kathy Hochul, viewed this offer skeptically. She pointed out that licensed sportsbooks in New York must pay a 51 percent tax on their gross gaming revenue. Davis also highlighted the moral dilemma of accepting money from activities currently deemed illegal, drawing comparisons to the controlled legalization of marijuana.

A further critical point is consumer protection. According to Katie Neer, a large portion of the trading volume on platforms like Kalshi or Polymarket comes from professional "super forecasters" who can actively move markets. She argued that this is not a pure entertainment offering with small bets. For the remaining 20 to 30 percent of users investing their money in these trades, she demanded a minimum level of state protection. Meanwhile, the CFTC, chaired by Michael Selig, is attempting to ensure market integrity through new rules, while legal experts like Dan Ullman expect the US Supreme Court to ultimately decide on the classification.

Background

Interestingly, horse racing is also coming into focus. While prediction markets are active in most sports, they have stayed away from racing due to specific federal laws. Polymarket briefly offered contracts for the Kentucky Derby but retracted them following a demand from Churchill Downs. Experts like lawyer William Gotimer still see an opportunity for the sport in prediction markets. Since horse racing is often more complicated than simple win-or-loss bets in F1 or NASCAR, prediction markets could fill niches, such as betting on awards like the Eclipse Award or the most successful jockey of a season.

Parallel to this, there are efforts in Europe to address the fragmentation of gambling taxes. Victor Negrescu, Vice President of the European Parliament, proposed a coordinated EU levy of 1 percent on Gross Gaming Revenue (GGR). This could generate between 2 and 4 billion euros annually for education and youth policy. However, critics like Claus Hambach warn that excessive tax burdens, as already seen in Germany, endanger the channelization rate and could drive players back to the black market. In Germany, online slots and poker are already taxed based on stakes rather than revenue, which heavily impacts profitability.

Why it matters for German players

For German players, the legal situation remains strictly defined by the Interstate Treaty on Gambling 2021 (GlüStV 2021). Prediction markets, as discussed in the USA, often fall into the category of sports betting or require separate approval from the Joint Gambling Authority of the States (GGL). German users should note that only providers on the official GGL whitelist are allowed to operate legally. This is where strict player protection rules are anchored, such as the cross-provider monthly deposit limit of 1,000 euros, monitored via the LUGAS system.

A stake limit of 1 euro per spin for virtual slot games and mandatory identity verification are standard in Germany. Providers that do not follow these rules or do not hold a German license are considered illegal. Protection against gambling addiction is a top priority, which is why marketing and bonus offers are strictly regulated. Anyone playing on unregulated platforms waives all legal security regarding winnings and exposes themselves to the risk of data misuse.

What it means for GGL-licensed casinos

For operators with a GGL license, the international debate on prediction markets and new tax models represents an ongoing challenge. They already have to cope with high tax rates while competing with the illegal black market, which does not adhere to stake limits or LUGAS reporting. The discussion about a harmonized EU tax could ensure more fairness in the long term, but carries the risk that already heavily burdened German providers will be asked to pay even more. Trust and authenticity are the most important currencies here. As Itai Pazner, former CEO of 888 Holdings, emphasizes:

"I would say first and foremost it’s the authenticity of the product and the operator being fair and responsible." - Itai Pazner, Consultant and former CEO of 888 Holdings