A coalition representing major prediction market platforms, including Kalshi, Crypto.com, and Polymarket, filed a lawsuit on Friday seeking to overturn Kentucky’s newly enacted 14.25% excise tax on prediction markets. The legal challenge argues that the tax is discriminatory, unconstitutional, and conflicts with federal law.

The tax, approved by the Kentucky General Assembly in April, applies to transaction fees collected by prediction market operators. These platforms allow users to trade contracts tied to the outcomes of real-world events, such as elections, economic indicators, sporting events, and geopolitical developments.

The lawsuit, filed by the Coalition for Fair Markets in Kentucky state court, contends that the state is unfairly targeting prediction markets. The coalition notes that horse racing wagers in Kentucky are subject to a lower tax rate, arguing that prediction market operators are being treated less favorably.

Kentucky Attorney General Russell Coleman defended the law and pledged to fight the lawsuit. He criticized out-of-state companies for challenging Kentucky’s gaming regulations and expressed confidence that the state would prevail in court.

According to the coalition, the tax could discourage federally regulated prediction markets from operating in Kentucky and push consumers toward unregulated alternatives. Kalshi stated that imposing state-specific taxes on federally supervised exchanges undermines legal, transparent markets and limits access to consumer protections.

The dispute comes at a time when prediction market companies are working to gain broader acceptance among policymakers and the public. Supporters view the platforms as legitimate financial markets, while critics argue they resemble gambling operations. Ongoing legal and regulatory battles across the United States continue to shape the future of the industry.

Prediction markets have also faced scrutiny over allegations of insider trading. Recent cases have included investigations into traders accused of using nonpublic or classified information to profit from event-based contracts, raising concerns about oversight and market integrity.