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Kalshi and prediction markets in Kentucky: taxes and legal status

Kentucky taxes gambling winnings and prediction market profits as income (3.5% flat). Gambling losses only reduce your state tax if you itemize, and only up to your winnings.

As of October 27, 2026, Kentucky's attorney general is suing Kalshi, Polymarket and their partners over sports contracts, and no order stops trading yet. Where it stands

Checked October 27, 2026 against Kentucky’s tax department, court dockets and regulator records.

Kentucky at a glance

Income tax
3.5% flat
Gambling losses
Only if you itemize
2026 federal 90% rule
Not stated yet
Prediction markets
State suing, tax coming

Income tax

How does Kentucky tax gambling and prediction market winnings?

Kentucky's flat income tax rate is 3.5% for tax years starting in 2026. It was 4% for 2024 and 2025.

Kentucky taxes short-term trading gains as ordinary income at the flat rate.

Tax on the platforms: Kentucky taxes prediction market operators. HB 757 (2026 Regular Session, Acts ch. 161, enacted over veto on April 14, 2026) creates KRS 138.506 and 138.507: a 14.25% excise tax on an operator's transaction fees, starting January 1, 2027. A transaction fee includes the operator's fee and the amount a consumer pays to buy an event contract. The tax is due monthly by the 20th of the next month and applies to Kentucky residents and to nonresidents buying while in Kentucky. This is charged to the platform, not added to your return.

Gambling losses

Can you deduct gambling losses in Kentucky?

Kentucky lets you deduct gambling losses only if you itemize. Kentucky net income allows federal itemized deductions, and the statute specifically keeps wagering losses allowed under Section 165(d). You can instead elect the Kentucky standard deduction, so the losses help only if you itemize.

  • Kentucky includes gambling winnings in income.
  • Kentucky law lets you elect the Kentucky standard deduction instead of itemized deductions.
  • It is unclear whether Kentucky follows the federal 90% gambling-loss limit from 2026.

Timeline · 3 steps

Every step in Kentucky, in order

3 steps since Apr 14, 2026, oldest first. Each links the filing, order or page it comes from.

  1. Apr 14, 2026

    Legislature · Kentucky General Assembly · HB 757 (2026) (Acts Ch. 161)

    The legislature passed HB 757 with an excise tax on prediction market operators, and the bill was delivered to the Secretary of State on April 14, 2026.

    Kentucky legislature, HB 757 record

  2. Jun 17, 2026

    Attorney general · Kentucky Attorney General · Commonwealth of Kentucky v. KalshiEX LLC and Commonwealth of Kentucky v. QCX LLC (Nos. 3:26-cv-00048 and 3:26-cv-00047 (E.D. Ky.))

    Attorney General Russell Coleman announced lawsuits in Franklin Circuit Court against Kalshi and its affiliates including Coinbase, and against Polymarket, saying they run unlicensed sports betting in Kentucky. The cases were moved to federal court in Frankfort on June 18 and 19.

    Kentucky AG press release, June 17, 2026

  3. Jul 15, 2026

    Legislature · Kentucky General Assembly · HB 904 (2026) (Acts Ch. 184)

    HB 904 bars Kentucky's licensed gaming operators from contracting with providers that offer prediction market event contracts in the state. The attorney general's office gave July 15, 2026 as its effective date.

    Kentucky legislature, HB 904 record

Federal courts

What the federal courts and the CFTC have said

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.

  1. Apr 6, 2026

    Court · U.S. Court of Appeals for the Third Circuit · KalshiEX LLC v. Flaherty (No. 25-1922)

    By a 2-1 vote, the appeals court for New Jersey, Pennsylvania and Delaware upheld an order that stops New Jersey from enforcing its gambling laws against Kalshi's sports contracts for now. It found Kalshi likely to win its argument that federal law overrides the state. This is a preliminary ruling, not a final judgment.

    Third Circuit opinion, Apr. 6, 2026

  2. Aug 28, 2026

    Court · U.S. Court of Appeals for the Ninth Circuit · KalshiEX LLC v. Assad (No. 25-7516)

    A unanimous three-judge panel upheld the order that lifted Kalshi's protection against Nevada, so Nevada may enforce its gambling laws against Kalshi's sports contracts. The court held that sports contracts are not swaps under federal law. It sent Kalshi's election contracts back to the district court. This is a preliminary ruling.

    Ninth Circuit opinion, Aug. 28, 2026

  3. Sep 2, 2026

    Court · Supreme Court of the United States · Flaherty v. KalshiEX, LLC (No. 26-299)

    New Jersey asked the Supreme Court to review the Third Circuit ruling. Kalshi's response is due November 9, 2026 after an extension. Many states, tribes, the NFL and others have filed friend-of-the-court briefs. The Court has not decided whether to take the case.

    Supreme Court docket No. 26-299

  4. Sep 16, 2026

    Court · U.S. Court of Appeals for the Ninth Circuit · Blue Lake Rancheria v. Kalshi, Inc. (No. 25-7504)

    In a case brought by two California tribes, the court held the tribes are likely to win their claim that Kalshi's sports contracts offered on tribal lands break the federal Indian Gaming Regulatory Act, and sent the case back to the lower court. A Lanham Act (false advertising) claim was rejected.

    Ninth Circuit opinion, Sept. 16, 2026

  5. Sep 25, 2026

    Court · U.S. Court of Appeals for the Sixth Circuit · KalshiEX LLC v. Schuler (Ohio) and KalshiEX LLC v. Orgel (Tennessee) (Nos. 26-3196 and 26-5235)

    A unanimous panel upheld a federal judge's refusal to block Ohio's gambling laws and threw out the order that had protected Kalshi in Tennessee. It held Kalshi's sports contracts are not swaps and, even if they were, federal law does not override the states' gambling laws. The cases go back to the lower courts.

    Sixth Circuit opinion, Sept. 25, 2026

  6. Oct 9, 2026

    Regulator · Commodity Futures Trading Commission

    The CFTC proposed a rule that would expressly define event contracts, including those on sports, politics, culture and weather, as swaps, which would place them under federal rather than state oversight. The public may comment for 30 days after Federal Register publication (91 FR 66022). It is a proposal, not a final rule. The same day the CFTC issued an interim rule excluding casino-style gambling products, such as sportsbook wagers and casino games, from the swap definition (91 FR 65969).

    CFTC press release 9310-26, Oct. 9, 2026

  7. Oct 26, 2026

    Court · U.S. Court of Appeals for the Fourth Circuit · KalshiEX LLC v. Martin (Maryland) (No. 25-1892)

    No ruling yet. The appeal was argued May 7, 2026 and the parties were still filing supplemental authorities on Oct. 26, 2026.

    CourtListener docket, Fourth Circuit No. 25-1892

Your trades

Kalshi and Polymarket profits in Kentucky

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. Kentucky uses its own definitions, so check how it treats the method you choose federally. If you report as gambling, the loss rules above apply. The four methods, compared.

The court cases are about whether Kentucky 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.

Questions

Questions about Kentucky

Does Kentucky tax gambling winnings?
Kentucky taxes gambling winnings and prediction market profits as income (3.5% flat). Gambling losses only reduce your state tax if you itemize, and only up to your winnings.
Can I deduct gambling losses in Kentucky?
Kentucky lets you deduct gambling losses only if you itemize. Kentucky net income allows federal itemized deductions, and the statute specifically keeps wagering losses allowed under Section 165(d). You can instead elect the Kentucky standard deduction, so the losses help only if you itemize.
Is Kalshi legal in Kentucky?
As of October 27, 2026, Kentucky's attorney general is suing Kalshi, Polymarket and their partners over sports contracts, and no order stops trading yet. Kentucky also passed a law that taxes prediction market operators starting January 1, 2027. The tax is on the operators' fees, not on your trades.
Does the court fight change how my trades are taxed?
No. These cases decide whether a state can license or stop the platforms. None of them decides how your trades are taxed, and trades you already made still count in your tax year.

States with the same rule on losses: Maine, Maryland, Michigan, Minnesota, Missouri, Montana. All states.

Tax facts checked against Kentucky’s own tax pages on October 27, 2026; legal status on October 27, 2026. Rules and cases change, so confirm with current instructions before you file.

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