$1 B in Lost State Revenues — How Prediction Markets Threaten Gambling Tax Funds

The American Gaming Association (AGA) announced on Thursday that states and tribes have lost more than $1 B in tax revenue to prediction‑market platforms, a figure that dwarfs the $18.09 B in gaming taxes collected in 2025 (AGA, 30 May 2026).

Prediction‑Market Platforms Drain Tax Revenue — The Stakes for State Budgets

States and tribes attribute the $1 B loss to the rapid rise of federally regulated prediction‑market exchanges such as Kalshi and Polymarket, which have opened betting markets for real‑world events at odds similar to traditional sportsbooks. The AGA’s estimate, released on 30 May 2026, hinges on the claim that these platforms siphon off wagers that would otherwise generate state tax revenue under existing sportsbook licenses (AGA, 30 May 2026).

Kalshi counters that the figure is “fake math from casinos” (Kalshi, 28 May 2026). The Coalition for Prediction Markets argues that AGA’s sources are unverified (Coalition, 29 May 2026). Despite the dispute, the narrative has resonated with state officials who argue that prediction markets operate without the taxes, licensing, and responsible‑gaming oversight that traditional sportsbooks pay (AGA, 30 May 2026).

In New York, where online sports‑betting taxes sit at 51% — the highest in the country — state officials reported roughly $1.3 B in tax revenue for 2025 (New York State Gaming Commission, 31 May 2026). The AGA’s $1 B figure implies a comparable loss in a single state, underscoring the potential scale of the problem across the U.S.

Federal Regulation Leaves Prediction Markets in a Legal Grey Zone — Why States Are Losing Money

The Commodity Futures Trading Commission (CFTC) regulates prediction‑market platforms at the federal level, allowing them to operate nationwide even in states where traditional sportsbooks are prohibited (CFTC, 15 May 2026). State lawmakers have long argued that these platforms should be subject to the same licenses, taxes, and responsible‑gaming rules that sportsbooks currently obey (AGA, 30 May 2026). However, court rulings have been split, and the CFTC has consistently sided with the platforms in new cases (CFTC, 20 May 2026).

Because the federal framework does not impose state taxes or licensing fees on prediction markets, the platforms capture bets that would otherwise be taxed. The AGA’s estimate suggests this gap amounts to over $1 B annually, a figure that could undercut state budgets dedicated to education, pension contributions, and community programs (AGA, 30 May 2026).

Federal enforcement has focused more on securities compliance than on gambling regulation, leaving a regulatory void that prediction‑market operators exploit (SEC, 10 May 2026). Meanwhile, state attorneys general have struggled to secure jurisdictional authority, further widening the tax revenue shortfall (AGA, 30 May 2026).

Prediction Markets Fuel a Political War Over Gambling Policy — The Role of Lobbying and Super PACs

The AGA’s lawsuit against prediction‑market platforms is part of a broader political push to protect the gambling industry’s monopoly on tax revenue. The AGA’s lobbying efforts have been amplified by the industry’s spending on super PACs, which collectively spent $139 M in the 2024 election cycle (CryptoSlate, 15 May 2026). These funds were directed at both parties, ensuring political support for gambling‑friendly legislation (CryptoSlate, 15 May 2026).

Prediction‑market operators counter with their own lobbying arms, emphasizing consumer choice and innovation. The Coalition for Prediction Markets has pledged to challenge AGA’s claims in court, arguing that the platforms provide a new form of betting that should be treated differently under existing statutes (Coalition, 29 May 2026).

State officials, meanwhile, have stepped up their own political campaigns, warning voters that the loss of $1 B in tax revenue could divert funds from education and public services (AGA, 30 May 2026). The debate has become a flashpoint in state budget discussions, with governors and attorneys general citing the figure in public statements and legislative hearings (AGA, 30 May 2026).

Economic Implications for the Gambling Industry — Revenue Growth vs. Tax Erosion

In 2025, the U.S. gambling industry generated $78.72 B in revenue and $18.09 B in gaming taxes (GAO, 31 May 2026). The AGA argues that this record growth masks a hidden erosion of tax revenue due to prediction markets. If the $1 B loss persists, the net tax income could shrink by roughly 5.5% of the total gaming tax revenue (AGA, 30 May 2026).

Casino operators, who already pay into the state tax system, fear that the loss of tax revenue will force them to absorb higher state taxes or reduce community contributions to stay competitive (AGA, 30 May 2026). A reduction in state funding could also lead to cuts in responsible‑gaming programs, potentially increasing problem gambling rates (AGA, 30 May 2026).

Conversely, proponents of prediction markets argue that the platforms add liquidity and diversify betting options, potentially driving overall wagering volume upward. They claim that increased betting activity could offset the tax loss by expanding the overall tax base (Kalshi, 28 May 2026). However, the AGA’s data suggests that the tax loss is not compensated by a proportional increase in wagering volume (AGA, 30 May 2026).

Regulatory Outlook — Potential State‑Level Interventions and Their Impact on the Crypto‑Native Betting Ecosystem

States are exploring new licensing frameworks that would bring prediction‑market platforms under state tax and responsible‑gaming regimes. New York has drafted a proposal to apply its 51% tax rate to online prediction markets, potentially reclaiming up to $650 M in lost revenue (NY Gaming Commission, 10 May 2026). If enacted, this would force platforms to pay state taxes and adopt compliance programs similar to traditional sportsbooks (NY Gaming Commission, 10 May 2026).

Other states are considering withholding tax registration for prediction markets, requiring them to obtain the same state licenses as sportsbooks. This could create a more level playing field but would also increase operational costs for platforms, potentially stifling innovation in the crypto‑native betting space (AGA, 30 May 2026).

The federal government remains unlikely to intervene, given the CFTC’s current stance and the lack of a congressional mandate to regulate prediction markets as gambling (CFTC, 20 May 2026). Consequently, states will likely become the battleground for tax policy and regulatory oversight, with the outcome directly affecting the viability of prediction‑market platforms in the U.S. (AGA, 30 May 2026).

On‑Chain Data Highlights the Shift — The Growth of Crypto‑Based Prediction Markets

On‑chain analytics show that the total value locked (TVL) in prediction‑market protocols rose from $200 M in early 2025 to $350 M by mid‑2026 (Chainalysis, Q2 2026). This 75% increase in TVL translates to higher betting volumes, yet the platforms have not yet adopted state tax frameworks (Chainalysis, Q2 2026).

Protocol developers argue that their platforms provide transparency and immutable audit trails, reducing the risk of fraud compared to traditional sportsbooks. However, the lack of state oversight means that tax collectors cannot verify the source of betting funds, making it difficult to enforce tax compliance (Chainalysis, Q2 2026).

Regulators may look to on‑chain data to enforce tax collection by tracking wallet addresses and wagering activity. Yet the pseudonymous nature of crypto wallets poses challenges for state tax authorities, who rely on traditional identification methods (Chainalysis, Q2 2026).

Investor Takeaway — Should Crypto‑Native Betting Platforms Be Considered a Risky Asset?

From an investment standpoint, the regulatory uncertainty surrounding prediction markets introduces a significant legal risk. If states enact tax and licensing requirements, platforms may face higher compliance costs and reduced profitability (AGA, 30 May 2026). Conversely, a favorable regulatory outcome could open new markets and increase betting volume, boosting revenue streams (Kalshi, 28 May 2026).

For investors in crypto‑native betting protocols, the key risk lies in the potential for abrupt regulatory changes that could devalue the platforms’ tokens or restrict user participation. On‑chain data indicates that user activity is already shifting toward more regulated jurisdictions, suggesting a possible migration of liquidity (Chainalysis, Q2 2026).

Investors should monitor state legislative sessions and CFTC rulings closely, as any decisive regulatory move could swing market sentiment dramatically (AGA, 30 May 2026).

Key Developments to Watch

• New York Gaming Commission proposal (May 15 2026) — Potentially applies 51% tax to prediction markets
• CFTC’s upcoming policy statement (Q3 2026) — Clarifies jurisdiction over prediction markets
• Chainalysis TVL report (June 2026) — Tracks growth in crypto‑based betting protocols

Can the gambling industry’s political clout successfully re‑tax prediction markets without stifling innovation and consumer choice?