New York has moved to sue Polymarket as prediction markets offer sports contracts outside the state’s sportsbook tax framework, raising questions about a gambling-tax base worth more than $1 billion a year. The platforms argue that they operate as federally overseen derivatives exchanges, not under state gambling laws, a dispute that could shape where sports-related wagering is taxed.
The conflict puts a large revenue stream in focus. New York’s legal and tax treatment of prediction-market contracts is also part of a broader debate over whether these products compete with licensed sportsbooks.
Mobile sports betting generated about $328 million in tax receipts for New York in the first quarter of 2026, according to the state comptroller’s office. New York accounts for roughly one-third of all state tax collections on sports-betting revenue nationwide, while licensed sportsbooks face a 51% state tax rate.
A Tax Policy Center analysis estimates that if 1% of New York sportsbook activity shifted to prediction markets, the state could lose $13 million in revenue. That is a modeled estimate, not evidence that the shift has already happened. Polymarket and Kalshi have added sports-related contracts, giving customers another way to trade on sporting events.
Federally regulated prediction-market exchanges could compete with licensed sportsbooks while operating under a different regulatory framework. That distinction is central to the competition between prediction markets and sportsbooks, but the potential tax impact depends on whether customers actually move their activity.
DraftKings has offered one early indication that the audiences may differ: a company spokesperson said about 1% of its sportsbook customers overlap with Kalshi in states where sports betting is legal. That customer-overlap figure is separate from the Tax Policy Center’s estimate, which models a 1% shift in sportsbook activity across New York.
Kalshi disputes that its growth is taking revenue from traditional sportsbooks. Company spokesperson Dani Lever said, “We can operate under federal regulation while continuing to generate vital tax revenue for states.” Prediction-market operators maintain that federal oversight applies to their exchanges rather than state gambling laws; New York’s position puts that claim in direct tension with the state’s tax system.
Maria Doulis, New York State deputy comptroller for budget and policy analysis, said, “For a user, it’s not clear that engaging in activity on a prediction market is a substantially different activity than placing a wager on a mobile sports betting platform,” and added, “But from the state’s perspective, those two activities are taxed differently and can yield two different outcomes.”
Kalshi’s trading volume rose nearly thirteenfold in the year after it added sports contracts. Polymarket also saw rapid growth after adding sports, according to a New York State Comptroller report. Those figures indicate expanding activity, but do not establish how much-if any-came from customers leaving state-licensed sportsbooks.
The fiscal stakes extend beyond tax receipts. Calls to New York’s gambling hotline have risen 8.5% since 2020, and the state has doubled funding for problem-gambling services, from $6 million to $12 million. Prediction markets’ growth could add to the state’s policy challenge if more gambling activity shifts beyond its existing framework.
Sportsbook revenue can fluctuate even without competition from prediction markets. The New York Knicks’ NBA Finals win, after entering the series as underdogs, led mobile sportsbooks to lose $14.4 million in gross revenue. Doulis said volatility-or a surge in prediction markets that affects sports-betting revenue-could have implications for state finances.
New York has not identified a hearing, deadline or other procedural next step in the account of its move against Polymarket. The unresolved question for the state is whether prediction markets can keep expanding without diverting enough sportsbook activity to make the tax impact more than a projection.
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