What's Next for Prediction Markets if States Win at High Court

New Jersey's Sept. 2 petition asking the U.S. Supreme Court to resolve the fight over who regulates prediction markets has put a multibillion-dollar question squarely in front of the justices: Are sports-related event contracts financial derivatives subject exclusively to federal oversight, or are they gambling products that states can regulate the way they regulate any other sportsbook?

No ruling has been issued, and the court hasn't even decided whether to take the case. But it's worth thinking through what happens if the justices go the other way from the U.S. Court of Howard Herndon Appeals for the Third Circuit in its April 6 decision in KalshiEx LLC v. Flaherty - reversing course and holding that state gambling law applies to sports-related event contracts, notwithstanding U.S. Commodity Futures Trading Commission registration.

That's no longer a purely hypothetical path: The U.S. Court of Appeals for the Sixth Circuit ruled on Sept. 25 in Kalshi v. Schuler that Ohio's and Tennessee's gambling laws are not preempted, vacating a lower court injunction that had blocked Tennessee from enforcing its sports-wagering framework against Kalshi. In doing so, the Sixth Circuit backed the U.S. Court of Appeals for the Ninth Circuit's Aug. 28 decision against Kalshi in Kalshi v. Assad, deepening a circuit split with the Third Circuit's contrary ruling in the New Jersey case that is now before the Supreme Court on a cert petition.

Whether it arrives through this deepening split or eventually through the Supreme Court itself, the justices reversing the Third Circuit's holding in Flaherty would not shut prediction markets down nationwide. It would instead hand the question back to 50 different state legislatures and gaming commissions, each with its own history, infrastructure and appetite for wagering.

What follows is a look at how that patchwork might take shape - starting with the states that already have sports betting regimes, then turning to the harder case of states like California and Texas that don't.

States That Already Regulate Sports Betting: An Easier Lift

For states like New Jersey, New York, Pennsylvania, Nevada, Michigan, Colorado and Massachusetts, a Supreme Court win wouldn't require building a regulatory apparatus from scratch.

These states already run the infrastructure a prediction market would need to plug into: licensing regimes, tax collection systems, geolocation and age-verification requirements, self-exclusion and problem-gambling programs, and relationships with sports leagues over data feeds and integrity monitoring.

What Likely Stays the Same

The Regulators Themselves

State gaming commissions - the New Jersey Division of Gaming Enforcement, the Massachusetts Gaming Commission and their counterparts - would almost certainly be the bodies asked to absorb prediction markets into their existing oversight, rather than states standing up new agencies.

Consumer Protection Infrastructure

Self-exclusion lists, problem-gambling helplines, advertising restrictions and age/identity verification requirements would likely extend to prediction market platforms largely as-is, since these protections are typically written to apply to wagering broadly rather than to specific bet types.

Geolocation Enforcement

States already require sportsbooks to verify a bettor's physical location at the time of the wager. That technology and legal requirement would transfer over directly.

What Likely Changes

Licensing Categories

Existing statutes are largely written around sportsbooks and casino operators, not exchange-style platforms where users bet against each other rather than against the house.

States would likely need to amend statutes - or issue new regulatory guidance - to define what an exchange license looks like, including questions about capital requirements, custody of user funds and market-maker rules that don't map neatly onto how DraftKings or FanDuel operate today.

Tax Models

Most states tax sportsbooks on gross gaming revenue, or GGR. This is "the hold," or what the operator keeps after paying out winners. That model works because a sportsbook is a dealer, not a marketplace: It sets the odds, takes the other side of every bet and its margin is baked into the price itself.

A standard -110/-110 line implies a combined 104.76% probability across both sides - the extra 4.76 points is the built-in margin, charged on every bet regardless of outcome, and the realized hold across a sportsbook's full mix of straight bets, parlays and props typically runs into the high-single digits or more over a month.

An exchange like Kalshi is a fundamentally different kind of business: It never takes a side, and it earns money by charging a small, transparent fee to match a buyer and a seller, not by capturing a share of who wins. That fee is mechanical rather than statistical - Kalshi's own published fee schedule works out to a few cents per contract, which is consistent with North Carolina's own fiscal estimate, discussed below, that gross fee revenue runs to only about 1.3% of trading volume.

Because an exchange's actual revenue base is a fraction of the size of a sportsbook's hold, states would need some way to define what counts as taxable revenue for a fee-based platform rather than simply extending their existing GGR, which would either raise negligible money at the sportsbook rate or require a punishing rate on the exchange's thin margins to raise anything comparable.

Two states have already built real answers to this, for different reasons.

Tennessee, notably, solved a version of the problem in 2023 when it replaced its 20% GGR tax with a flat 1.85% tax on handle - the total amount wagered, not what the operator keeps. That change was adopted mainly for revenue predictability, but it happens to sidestep the exchange-taxation problem entirely: A handle tax simply requires tracking dollars wagered, a figure a prediction market platform can report as easily as a traditional sportsbook, without any need to define or audit trading fee revenue.

North Carolina went further and built a tax specifically for exchanges: As part of its 2026 budget, it enacted a 6% tax on prediction market operators' net trading fee revenue - not handle, and not GGR, but the fee revenue an exchange actually earns after paying out promotions and incentives.

Legislative fiscal analysts estimated that gross fee revenue for prediction market operators runs to roughly 1.31% of trading volume, and that after accounting for the roughly 25% of that gross revenue paid back out to customers in promotions, the taxable net-fee base comes to about 0.98% of volume - a useful illustration of just how thin exchange margins are relative to a sportsbook's typical high-single-digit hold.

Notably, North Carolina created this as its own tax category rather than folding prediction markets into the sports-wagering tax rate it raised in the same bill - from 18% to 23%. It did so through its regular budget process rather than stand-alone gambling legislation: a live example, well ahead of any Supreme Court ruling, of a state building tax infrastructure for exchange-style platforms from the ground up rather than retrofitting an old one.

Tennessee's own framework may not stay theoretical for long, either. With the Sixth Circuit's Sept. 25 ruling vacating the injunction that had shielded Kalshi from Tennessee's sports-wagering law, the case now returns to the U.S. District Court for the Middle District of Tennessee, putting Tennessee's handle-based tax and licensing regime on a path to being applied directly to Kalshi's sports event contracts well before any Supreme Court decision resolves the broader question nationally.

Exclusivity and Compact Renegotiation

In states where casino operators or tribal gaming entities hold exclusive rights to offer sports betting, the entry of prediction market platforms could raise questions about whether exchanges count as a new entrant subject to those existing arrangements.

This is likely to look different state by state depending on market structure: Tennessee, for instance, has no retail casinos and launched as a mobile-only sports-betting market from the start, so it never had to negotiate around existing casino exclusivity deals the way New Jersey or Pennsylvania did.

States with a similar mobile-first structure may find it comparatively straightforward to license exchange platforms directly, while states with entrenched retail or tribal exclusivity arrangements will have more to work out.

Integrity Fees and League Relationships

Sports leagues have pushed for integrity fees tied to sportsbook revenue in the traditional betting context. Expect leagues to seek similar arrangements - or litigation - over prediction market contracts tied to games.

A Carveout Fight Over Nonsports Contracts

States would likely face pressure to distinguish sports-related event contracts - which fit existing gambling definitions - from contracts on elections, economic indicators or corporate earnings, which don't obviously resemble a sports bet and may be harder to regulate under existing gambling statutes without new legislation.

The rough historical parallel here is the aftermath of the Supreme Court's 2018 decision in Murphy v. NCAA, which struck down the federal ban on state-authorized sports betting - the Professional and Amateur Sports Protection Act, passed in 1992 - and left states to build their own frameworks. States adapted at different speeds and landed on different tax rates and licensing structures, and that variation is a normal feature of state-based regulation, not a defect in it.

A state win in the prediction markets case would likely follow a similar pattern: a wave of statehouse bills and regulatory guidance, arriving on different timelines in different states, rather than a single uniform transition - much the same way sports betting itself rolled out state by state after 2018.

States Without Legal Sports Betting: California and Texas

The harder case is what happens in states that haven't authorized sports betting at all. If the Supreme Court hands regulatory authority back to the states, prediction markets in those states wouldn't suddenly become legal under a new framework. They would, in the near term, likely become illegal by default, since the underlying activity - wagering on sports outcomes - isn't authorized there in any form.

California has its own well-established political landscape on this question, separate from anything a prediction markets ruling would introduce. Sports-betting ballot measures - Propositions 26 and 27 in 2022 - both failed decisively, with tribal gaming interests, which hold significant political and financial influence in the state, opposing commercial and online operators encroaching on their exclusive gaming compacts.

A ruling in favor of the states wouldn't create that dynamic; it would simply mean the same tribal-compact questions that have already shaped California's sports-betting debate would extend to prediction markets as well. Tribes would likely argue that sports-tied event contracts fall under their existing exclusivity agreements, and California's approach to prediction markets would probably track however that underlying compact question gets resolved - through enforcement in the near term, and potentially new legislation or renegotiated compacts over a longer horizon, following the same path the state has already been on with sports betting generally.

Texas has its own distinct starting point: The state constitution restricts most forms of gambling, and legalizing sports betting has stalled in the Texas Legislature to date despite interest from sports franchises and betting operators.

Texas also has a policy tradition of drawing sharp lines between financial products and gambling, which could give regulators or lawmakers a basis to treat nonsports event contracts, like those on interest rates, elections and economic data, differently from sports- tied contracts, with the latter fitting more squarely within existing gambling law. That distinction would likely need to be made explicit through legislation or an attorney general opinion, with enforcement action against unlicensed sports-related offerings as the state's near-term tool while any broader framework is worked out.

In both states, and others without sports betting - Utah among them - a similar sequence is plausible: The attorney general's office acts first, using existing enforcement tools against unlicensed sports-related offerings, while the legislature takes up the broader question on its own timeline, informed by whatever constituent demand or in-state industry interest emerges.

The Federal Residue

Even in a state-win scenario, the CFTC likely wouldn't disappear from the picture entirely. The agency's core jurisdiction over financial derivatives - interest rate swaps, commodity futures and event contracts unrelated to sports - would presumably remain intact.

The practical effect of a state-friendly ruling would likely be narrower than a full reversal of federal authority: It would carve sports-related event contracts out of the CFTC's exclusive domain and hand that specific category to the states, while leaving the broader swaps framework the agency uses for other event contracts untouched.

That distinction - sports contracts as gambling, other event contracts as finance - is likely to become the central battleground in how any ruling gets interpreted and implemented.

How Platforms Would Likely Respond

Kalshi, Polymarket and similar platforms built their sports-related offerings around a single national regulator. A ruling in favor of the states would mean adopting the same state-by- state compliance model that traditional sportsbooks like DraftKings and FanDuel already operate under successfully today: geoblocking in states without a license, applying for licenses on a state-by-state basis and engaging with legislatures where a path to licensure exists.

That's a well-worn playbook - it's exactly how the sports-betting industry itself has operated since 2018 - and platforms with the resources to run a national sportsbook-style operation would be well positioned to run a national exchange-style one under the same model.

The Bottom Line

A Supreme Court ruling for the states would move the prediction markets question from one courtroom to the 50 statehouses and gaming commissions that already regulate wagering today.

States with existing sports-betting frameworks have direct experience to draw on, and - as Tennessee's handle-based tax and North Carolina's purpose-built net-fee tax both show - some already have, or are actively building, regulatory tools that fit an exchange's thin, fee- based margins more naturally than a traditional GGR and casino model built around a sportsbook's much larger embedded hold.

States without legal sports betting are working from a different starting point shaped by their own existing politics, not from any special difficulty posed by prediction markets themselves.

It's worth noting that North Carolina didn't wait for the Supreme Court to act - it enacted its tax in the middle of the pending litigation, evidence that at least some states are already treating this as workable territory rather than an open question they need a ruling to resolve.

Nothing here is settled, and the Supreme Court hasn't yet agreed to hear the case. But both the Murphy v. NCAA precedent and North Carolina's own recent example suggest that state- by-state regulation of a new wagering product is a well-established, workable process, not an obstacle to be avoided.

Republished with permission. This article, "What's Next for Prediction Markets if States Win at High Court," was published by Law360 on September 30, 2026. (login required)