Illinois Ruling Suggests States Can Still Tax Prediction Markets, But Design Matters

A federal district court in Chicago has handed prediction market operators a significant win on state licensing – and, at the same time, left the door open on state taxation. In Coinbase Financial Markets v. Raoul (consolidated with United States v. Illinois and KalshiEX v. Raoul), Nos. 1:25-cv-15406, 1:26-cv-03659 and 1:26-cv-07363 (N.D. Ill.), Judge Martha M. Pacold granted in part and continued in part motions for a preliminary injunction in a memorandum opinion and order dated October 2, 2026. The court held that Illinois' sports wagering licensing regime, as applied to exchange-traded event contracts, is likely preempted. The court reserved the question of Illinois' new transaction fee for further briefing. Six days later, however, the parties jointly told the court that briefing is unnecessary because the fee applies only to licensees; enjoining the licensing requirement also disables the tax.

A previous Holland & Knight alert discussed North Carolina's tax on prediction markets and suggested that exclusive federal regulation of these instruments does not necessarily foreclose state revenue measures. The Illinois opinion is the clearest judicial support for that proposition to date – with an important caveat about how the tax is built: A tax tied to a preempted license falls with the license.

What the Court Held

The court concluded that title-type sports event contracts traded on Kalshi, a Commodity Futures Trading Commission (CFTC)-designated contract market, are likely "swaps" under 7 U.S.C. Section 1a(47)(A)(ii), which reaches payments dependent on an event "associated with a potential financial, economic, or commercial consequence." Any such association, the court emphasized, must be concrete and material.

On preemption, the court worked within U.S. Court of Appeals for the Seventh Circuit precedent. Under Effex (7th Cir. 2019), the Commodity Exchange Act neither expressly preempts state law nor occupies the field. Under American Agriculture (7th Cir. 1992), however, state laws that "directly affect trading on or the operation of a futures market" for instruments within the CFTC's exclusive jurisdiction are conflict-preempted; laws touching only private relationships, such as the broker-investor relationship, are not.

Measured against that standard, the court held that Illinois' licensing rules under the Sports Wagering Act (230 ILCS 45) and related criminal provision (720 ILCS 5/28-1(a)(12)) are likely preempted. The laws dictate how the swaps are structured, which events they may reference and who may trade them and would, in practice, force Kalshi to construct an Illinois-only market. Thus, that represents a direct regulation of the market, not of a private relationship.

The Tax Question the Court Left Open

Illinois' fiscal year 2027 budget amended 230 ILCS 45/25-90 to impose a transaction fee on every "exchange wager" – defined as an agreement, contract, transaction or swap offered, traded or executed on a prediction market or exchange and tied to a sporting event. The rate is 1.75 percent on a licensee's first 5 million exchange wagers in a fiscal year and 3.5 percent thereafter. These fees sit atop the existing 15 percent fee on gross sports wagering receipts under Section 25-90(a) and the 25-cent or 50-cent per-wager fee under Section 25-90(d-7). Notably, the transaction tax in Section 25-90(d-20) is keyed to exchange wagers "conducted by a licensee," and several neighboring levies are imposed expressly "for the privilege of holding a license." Kalshi, which earns transaction fees, sued over the levy in June 2026. Illinois did not book the expected revenue in its budget.

The court called its views on the fees preliminary and ordered targeted additional briefing. Its starting point was straightforward: "Generally speaking, a state can impose a cost on an activity without creating a conflict." For that, it turned to New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995), where Employee Retirement Income Security Act of 1974 surcharges survived because they exerted only "indirect economic influence," did not bind plan administrators to any particular choice and because "cost uniformity was almost certainly not an object of pre-emption." Regulatory uniformity, the court reasoned, does not necessarily entail uniformity in cost – "taking a cut of Kalshi and Coinbase's profits, without more, might not pose the same conflict as regulating an entire market."

Travelers also supplies the limit. A charge may be preempted if it effectively forces the regulated party into a particular substantive scheme. The court framed the test as whether a fee "effectively regulates the operation of the market to circumvent the bar on the state directly regulating the market," adding: "What defendants cannot do overtly, they cannot do covertly." Citing De Buono (1997), it acknowledged that "some effect on the administration" may not conflict, while a significant enough effect might. Plaintiffs had not yet carried their burden; they conceded the inquiry is fact-sensitive, and the CFTC argued that depending on how the fees are calculated, they could operate as an outright ban.

The October 8 Joint Status Report: The Tax Falls with the License

The court directed the parties to propose a schedule for supplemental briefing on the fees by October 8, 2026. Instead, in a joint status report filed that day, every party – Coinbase, the U.S. and CFTC, Kalshi, the State of Illinois and its officials and intervenors – agreed that supplemental briefing was not necessary due to the structure and language of the law. Illinois law bars anyone from engaging in any activity in connection with sports wagering without the necessary licenses, and it defines "sports wagering" to include exchange wagering. The Sports Wagering Act's taxes, including the 1.75 percent/3.5 percent transaction tax, apply to licensees. Because the court intends to preliminarily enjoin Illinois officials from applying the licensing requirement to swaps traded on a designated contract market, the parties agreed that the injunction necessarily will also restrain enforcement of the tax provisions against CFTC-registered exchanges and intermediaries. The injunction removes the condition precedent to the tax – that the entity is licensed under the statute and offers sports wagers under that authority.

Critically, the parties expressly preserved the larger question. They acknowledged, as the court observed, that there is a separate question of whether the Commodity Exchange Act would preempt a hypothetical Illinois law that independently imposed a tax on federally regulated entities apart from any effort to regulate their conduct. That, the parties agreed, is not what the Sports Wagering Act does.

Holland & Knight Insights

The circuits are split. The U.S. Court of Appeals for the Sixth Circuit (KalshiEX v. Schuler, Sept. 25, 2026) and U.S. Court of Appeals for the Ninth Circuit (KalshiEX v. Assad, Aug. 28, 2026) held that the contracts are likely not swaps and/or that state law is not preempted; the U.S. Court of Appeals for the Third Circuit found both field and conflict preemption. Three certiorari petitions are pending at the U.S. Supreme Court (Nos. 26-299, 26-338 and 26-344). Separately, on October 19, 2026, the CFTC published a notice of proposed rulemaking (RIN 3038-AF82) proposing to further define "swap" to expressly include event contracts, including sports-, politics-, cultural- and weather-related event contracts. In a companion interim final rule effective the same day, the CFTC codified its position that casino-style gambling products, including sportsbook and casino-game wagers, are excluded from the swap definition.

Interested parties should continue to monitor any further appeals and whether Illinois responds by enacting a tax that stands apart from any licensing regime, similar to North Carolina's, which would squarely present the question the parties reserved. Over the longer term, the upstream uncertainty is substantial: A Supreme Court grant of certiorari or final CFTC rule could reset the "swap" question on which underlying analysis depends.

For more information, please contact the authors or another member of Holland & Knight's State and Local Tax Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.