Federal Regulator Moves to Block Illinois Prediction-Market Tax

The federal agency that polices commodity markets is asking a court to stop Illinois from taxing sports prediction markets just days before the tax takes effect, in a fight that will test whether states can touch a product the federal government says it alone controls.

The Commodity Futures Trading Commission has amended its existing lawsuit against Illinois and asked a federal court to block the state’s new tax on sports-event contracts before it starts on July 1, 2026. The agency moved in mid-June 2026, days after Governor JB Pritzker signed Illinois’s roughly $56 billion budget for fiscal 2027, which created the levy.

Illinois is the first state to tax this product at the transaction level. Operators face a 1.75% tax on each “exchange wager” — the budget’s term for a contract tied to a sporting event — rising to 3.5% once a platform clears five million trades in a fiscal year. The state also folded these contracts into its sports-betting framework, requiring prediction-market operators to obtain a license from the Illinois Gaming Board and pay a $1 million fee before serving residents.

Why a federal regulator is fighting a tax

The commission’s case rests on preemption, the principle that federal law overrides conflicting state rules. It argues that contracts traded on federally registered exchanges, known as designated contract markets, fall under the federal law governing commodity and derivatives trading, and that Congress handed the CFTC exclusive authority over them. A state tax aimed only at those contracts, in the agency’s view, is state regulation of a federal market dressed up as a revenue tool.

The CFTC also argues the tax is steep enough to work as a ban. In its amended complaint, the agency said the charges “likely meet or exceed the per-transaction fees the DCMs charge traders — especially at the 3.5% level — effectively operating as an outright ban.” That framing matters: a tax that prices a product out of a state is harder to defend as a neutral fiscal measure and easier to attack as a backdoor prohibition.

Illinois sees it differently. The state’s gaming regulator told the CFTC as early as 2024 that platforms offering sports-event contracts to residents were running unlicensed, illegal sportsbooks, and the state has built its tax around that theory, treating the contracts as wagers subject to gaming oversight no matter how the federal regulator classifies them. That stance underpins its move to tax the contracts per wager rather than leave them to federal hands.

A widening federal-state collision

The Illinois action is one front in a campaign the CFTC opened earlier this year. In April 2026, the commission, alongside the Justice Department, sued Illinois, Arizona, and Connecticut, seeking court rulings that federal law strips states of authority over the contracts and orders barring enforcement of state gambling laws against the exchanges. The agency’s chairman, Michael Selig, said it would keep defending traders against what it called overzealous state regulators.

The dispute now reaches well beyond three states. Kentucky has sued prediction-market operators, Minnesota moved to ban them outright, and the broader fight has hardened into coordinated resistance from state attorneys general who insist the contracts are unlicensed sports betting. The CFTC and the Justice Department have filed parallel suits against roughly eight states from April through June 2026.

The courts are divided. In April 2026, a federal appeals court became the first at that level to back the federal position, upholding an order that barred New Jersey from enforcing its gambling laws against Kalshi’s sports contracts. Other courts have gone the other way, a split that several legal observers expect will ultimately reach the Supreme Court.

What it means for operators

For prediction-market operators such as Kalshi, the immediate question is whether Illinois, one of the highest-tax, highest-volume betting markets in the country, stays a place they can afford to operate. Illinois’s decision to push these contracts through its sports-betting licensing system also hands an edge to licensed sportsbooks such as DraftKings, which already hold the permits the budget now demands and could roll out exchange-style products of their own.

The revenue at stake is large. The American Gaming Association has estimated that states have lost more than $1 billion in tax revenue as the contracts have spread; Kalshi has dismissed that figure as casino-driven fiction meant to protect sportsbooks’ market position.

For now, the tax is in limbo. Illinois has asked the court to pause the CFTC’s challenge while a related operator lawsuit is decided, and the state has said it is not currently enforcing its rules against prediction markets. The commission wants a court order halting the tax before July 1 and a permanent one barring it for good. Whether a judge treats a tax differently from an outright prohibition — and whether that answer arrives in Illinois before any appeals court settles the larger question — could reshape how every other state approaches the product.