Kalshi filed a federal lawsuit June 25 to block Illinois from taxing prediction market wagers at 1.75%-3.5% and requiring a $15 million sportsbook license effective July 1.
Kalshi filed suit in the U.S. District Court for the Northern District of Illinois on June 25, 2026, seeking to block a new state law from taking effect July 1. The law, embedded in Illinois Senate Bill 3019 as part of the state's $55.9 billion fiscal year 2027 budget, amends the Illinois Sports Wagering Act to treat prediction market contracts as sports wagers subject to state licensing and taxation.
The specific numbers: a 1.75% tax on the first 5 million sports wagers placed annually through a prediction market operator, rising to 3.5% on all wagers beyond that threshold. Operators must also hold an Illinois online sports betting license, which costs $15 million upfront for a four-year term with $1 million renewals.
Kalshi called the licensing process "costly and burdensome" in its complaint. It is seeking a temporary restraining order and a preliminary injunction to halt enforcement before the July 1 deadline.
Illinois taxes the gross notional value of each wager, not net profits. That is the key distinction. A losing trade still generates a state tax liability for the operator.
Start with a simple position: 100 contracts on a Kalshi market priced at $0.50 per contract. Notional wagered = $100. Maximum potential gain = $50 (the contracts pay $1 each if correct).
| Illinois tax bracket | Tax per $100 wagered | As a % of max potential gain |
|---|---|---|
| Tier 1: first 5M wagers/year | $1.75 | 3.5% |
| Tier 2: wagers beyond 5M/year | $3.50 | 7.0% |
Any state tax passed through to traders stacks directly on top of existing platform fees. For a market at $0.50, the break-even win rate rises with every dollar of additional friction. Run your specific position through the PM EV calculator to see the exact edge you need to stay profitable after the combined fee and tax load.
For the Kalshi fee schedule this would layer on top of, see the Kalshi 2026 fee guide.
The $15 million licensing fee is an operator fixed cost. Against Kalshi's May 2026 monthly volume of $16.81 billion, it is a rounding error per unit of volume. The variable wager tax is the material cost driver for active traders.
One critical caveat: these numbers assume Kalshi passes the cost through to Illinois users. The company could absorb the tax temporarily while litigation proceeds, or restrict Illinois access entirely. No pass-through mechanism has been announced as of June 30.
Kalshi's legal theory rests on federal preemption under the Commodity Exchange Act (CEA). The CFTC regulates Kalshi as a Designated Contract Market (DCM). Under the CEA, federal oversight of DCM-listed contracts has historically preempted state commodity and gambling laws. Kalshi argues Illinois cannot reclassify CFTC-regulated event contracts as sports wagers subject to state licensing.
Kalshi also objects to Illinois's geolocation requirement. The state law would require operators to only accept wagers from users physically inside Illinois. This conflicts with CFTC rules requiring DCMs to operate on a national basis.
This is the same federal preemption theory Kalshi advanced in Kentucky and other state battles earlier in 2026. The CFTC's June 12 notice of proposed rulemaking on event contracts signals federal support for this view, though that rule is still in the public comment period with a July 27 deadline. For a full breakdown of the CFTC's proposed framework and how it defines "gaming," see the CFTC prediction market rules guide.
Illinois's counterposition: prediction market sports contracts are functionally identical to sports bets, placing them under the state's gambling jurisdiction regardless of concurrent CFTC oversight.
The Northern District of Illinois will hear the TRO request before July 1. Three scenarios follow:
1. Court grants TRO. The law is paused while the case proceeds on the merits. Illinois traders continue at current Kalshi fee rates. No state wager tax is applied.
2. Court denies TRO. The law takes effect July 1. Kalshi then chooses between applying the cost to Illinois users, restricting Illinois access, or absorbing the tax while the merits are litigated. Any of these paths creates friction or access loss for Illinois-based traders.
3. Negotiated resolution. Kalshi and Illinois reach a settlement, or the legislature amends the law before enforcement begins. This is the least likely path before July 1 given the timeline.
The precedent matters beyond Illinois. It is the sixth-most-populous U.S. state. A state victory here creates a template for other states to layer local taxes and licensing requirements on top of CFTC-regulated platforms, potentially fragmenting what has been a nationally uniform fee structure. Use the fee calculator to model how state-level tax overlays change your all-in trading cost across different position sizes and price points.