The U.S. sports betting industry achieved a record $16.96 billion in revenue in 2025, a 22.8% increase over the previous year. This surge has intensified the debate over the legal status of prediction markets, which offer event-based contracts on various outcomes, including sports events.
The central question is whether these platforms constitute gambling and should be subject to state regulations and taxes.
Understanding Prediction Markets
Prediction markets are platforms where participants trade contracts based on the outcomes of future events, such as political elections, economic indicators, or sports results. Unlike traditional sportsbooks, these markets often operate under the oversight of the Commodity Futures Trading Commission (CFTC), classifying their offerings as financial derivatives rather than gambling products.
Platforms like Kalshi and Polymarket have gained popularity by allowing users to speculate on a wide array of events. Their classification as financial instruments has enabled them to operate in states where traditional sports betting remains illegal, raising questions about regulatory oversight and consumer protection.
Regulatory Challenges and State Responses
The rapid growth of prediction markets has prompted scrutiny from state regulators and traditional gambling operators. The American Gaming Association (AGA) has expressed concerns that these platforms circumvent US state gambling laws and tax obligations. In 2025, the AGA estimated that prediction markets diverted over $500 million in potential state tax revenue.
Several states have taken action against these platforms. For instance, Nevada and Maryland have issued cease-and-desist orders to prediction market operators, arguing that their activities constitute unlicensed gambling. Conversely, states like California and Texas, where traditional sports betting is not yet legalized, have not taken formal action, leaving prediction markets in a legal gray area.
Industry Perspectives and Legal Arguments
Traditional sportsbook operators contend that prediction markets create an uneven playing field by avoiding state regulations and taxes. They argue that all forms of betting on sports outcomes should be uniformly regulated to ensure consumer protection and fair competition.
On the other hand, proponents of prediction markets assert that their platforms provide valuable insights into public sentiment and can serve as tools for risk management. They emphasize that operating under federal financial regulations offers a different framework that should not be conflated with gambling laws.
Economic Implications
The distinction between prediction markets and traditional sports betting has significant economic implications. In 2025, Americans legally wagered approximately $166.94 billion on sports, generating substantial tax revenue for states. The AGA reported that state-licensed sportsbooks contributed over $3.7 billion in taxes, a 32.4% increase from 2024.
In contrast, prediction markets, regulated at the federal level, are not subject to state taxes, leading to concerns about potential revenue losses for states. This disparity has fueled calls for a unified regulatory approach to all forms of betting on event outcomes.
Legal Precedents and Ongoing Litigation
Legal battles are unfolding as states and prediction market operators seek clarity on the classification of these platforms. In December 2025, several prediction market companies formed the Coalition for Prediction Markets to advocate for consistent regulatory treatment across states. This coalition aims to address the patchwork of state regulations and promote a standardized approach to prediction markets.
Ongoing litigation, such as the class-action lawsuit filed against Kalshi in New York, underscores the contentious nature of this issue. The outcome of these legal proceedings could set important precedents for the future regulation of prediction markets in the U.S.
Consumer Protection and Market Integrity
Beyond regulatory and economic considerations, consumer protection remains a critical concern. Traditional sportsbooks are subject to stringent state regulations designed to ensure fair play, prevent fraud, and promote responsible gambling. The relative lack of state oversight for prediction markets raises questions about the adequacy of consumer protections on these platforms.
Ensuring market integrity is also paramount. The potential for manipulation in low-liquidity prediction markets has been highlighted as a risk, particularly when large bets can disproportionately influence market outcomes. Establishing robust regulatory frameworks is essential to maintain public trust in these markets.
What’s Next for U.S. Sports Bettors
Regulatory Developments: Ongoing legal proceedings and potential legislative actions may lead to changes in how prediction markets are regulated, impacting their availability and operation.
Market Expansion: As more states consider legalizing sports betting, the landscape for both traditional sportsbooks and prediction markets is likely to evolve, offering bettors new opportunities and platforms.
Consumer Education: Bettors should stay informed about the legal status and regulatory oversight of different betting platforms to make informed decisions and ensure compliance with applicable laws.