Kalshi and prediction markets in Connecticut: taxes and legal status

Connecticut's rates for 2025 are 2%, 4.5%, 5.5%, 6%, 6.5%, 6.9% and 6.99%. A 2% phase-out add-back applies at higher incomes.

Connecticut taxes short-term gains like other income at the same rates, because federal capital gain net income is part of federal adjusted gross income.

Connecticut doesn't allow a deduction for gambling losses, even when the federal return allows one. A resident can owe Connecticut tax on gross winnings even with net losses.

• Connecticut taxes residents on gambling winnings that are in federal adjusted gross income. Nonresidents are not taxed on gambling winnings, whether won in Connecticut or elsewhere. Part-year residents are taxed only on winnings received while resident. Residents get no credit for tax paid to another state on non-lottery gambling winnings.
• The 2025 CT-1040 has no itemized or standard deduction. Connecticut uses a personal exemption table instead.
• Connecticut payers withhold only when all three apply: the payer has an office or does business in Connecticut, the payment is subject to federal withholding, and the payee is a resident.

As of October 27, 2026, Connecticut's consumer protection department has told Kalshi, Robinhood, Crypto.com and six other platforms in writing to stop offering sports contracts to residents, and the state sued Kalshi in August 2026. These are agency orders and a pending lawsuit, not a court order stopping trading that we could confirm. Kalshi, Coinbase and Underdog have federal suits against the state, and Kalshi and Coinbase have appeals in the Second Circuit.

States say prediction market sports contracts are bets that their gambling laws cover, while Kalshi and the CFTC say they are swaps, a kind of derivative that only the federal Commodity Exchange Act and the CFTC regulate. The Third Circuit appeals court sided with Kalshi against New Jersey in April 2026, while the Ninth Circuit (Nevada, August 2026) and the Sixth Circuit (Ohio and Tennessee, September 2026) ruled for the states, all at the preliminary stage. The Fourth Circuit (Maryland) heard argument in May 2026 and had not ruled as of October 27. New Jersey's petition to the Supreme Court, Flaherty v. KalshiEX (No. 26-299), is waiting on Kalshi's response due November 9, 2026, and the Court has not yet said whether it will hear the case. On October 9, 2026 the CFTC proposed a rule defining event contracts as swaps.

The IRS hasn’t said how prediction market trades are taxed, so you pick one of four federal methods: capital gains, ordinary income, gambling or Section 1256. Connecticut starts from your federal figures, so the method you choose federally generally carries onto your state return. If you report as gambling, the loss rules above apply. The four methods, compared.

The court cases are about whether Connecticut can license or stop the platforms. None of them decides how your trades are taxed. Trades you already made, including positions an order made you close, still count in your tax year.