Best Prediction Markets Legal Guide 2026

Where They’re Legal, Where They’re Not, and What’s Changing

Last updated: February 2026

Prediction markets are legal in the United States at the federal level. The Commodity Futures Trading Commission regulates them as event contracts, and two major platforms — Kalshi and Polymarket — operate with CFTC approval. But the legal picture gets complicated fast once you look below the federal level.

State gambling regulators in Nevada, New York, and Massachusetts have challenged CFTC jurisdiction. Federal courts have issued conflicting rulings on whether federal commodity law preempts state gambling law. Some states are writing new legislation specifically for prediction markets, while others are trying to block them. For traders, the practical question is simple: can I legally trade on prediction markets where I live, and what happens to my money if the rules change?

This guide maps where prediction markets stand legally as of February 2026, covering federal regulation, the state-by-state breakdown, tax treatment, and the legal risks you should know about before depositing money. For a broader overview of how prediction markets work, see our complete prediction markets guide.

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Federal regulation: the CFTC framework

The CFTC is the primary federal regulator for prediction markets in the United States. Under the Commodity Exchange Act, event contracts — binary contracts that pay $1.00 if an event occurs and $0.00 if it doesn’t — fall under the CFTC’s jurisdiction as swaps or futures.

Kalshi’s path to legality

Kalshi became the first CFTC-regulated prediction market exchange in 2020 when it received its Designated Contract Market (DCM) license. As a DCM, Kalshi operates under the same regulatory framework as the Chicago Mercantile Exchange. Customer funds are segregated, trading is surveilled, and the platform files regular reports with the CFTC.

Kalshi fought a public legal battle with the CFTC over political event contracts. In 2023, the CFTC tried to block Kalshi from listing congressional control markets. Kalshi sued. A federal judge ruled in Kalshi’s favor in September 2024, and the D.C. Circuit upheld the ruling. By the November 2024 election, Kalshi was legally offering political event contracts.

The Trump administration has been more favorable to prediction markets. CFTC Chairman Mike Selig, appointed in early 2025, has publicly stated that prediction markets serve a “price discovery function” and that the CFTC has “exclusive jurisdiction” over event contracts on regulated exchanges.

Polymarket’s US re-entry

Polymarket originally operated without US regulatory approval. In 2022, it settled with the CFTC for $1.4 million and agreed to block US users. In 2025, Polymarket acquired QCX — a company that held CFTC registration — for approximately $112 million. This acquisition provided the regulatory path for Polymarket to re-enter the US market.

The US version of Polymarket launched in late 2025 with full KYC requirements (Social Security number and government ID verification). It operates under a CFTC no-action letter, which means the CFTC has agreed not to pursue enforcement while Polymarket operates within specified guidelines. A no-action letter is not the same as a full DCM license — it provides less regulatory certainty than Kalshi’s setup.

International Polymarket (the original version) continues to operate globally without US-style regulation. International users can still trade with minimal KYC in most jurisdictions.

What the CFTC does and doesn’t regulate

The CFTC regulates the exchanges (Kalshi, Polymarket US) and the contract structures. It does not regulate individual traders beyond standard anti-fraud and anti-manipulation rules. The CFTC’s position is that its authority preempts state-level regulation of event contracts traded on federally regulated exchanges — but as the next section shows, not everyone agrees.

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The federal vs. state jurisdictional battle

The biggest legal uncertainty in prediction markets isn’t whether they’re legal at the federal level. It’s whether states can also regulate — or ban — them.

The preemption argument

The CFTC and the major prediction market platforms argue that the Commodity Exchange Act preempts state gambling laws. The logic: event contracts are federally regulated commodities, just like corn futures or oil options. States can’t ban trading in corn futures on the CME, so they shouldn’t be able to ban event contracts on Kalshi or Polymarket.

Federal courts have partially supported this position. In Kalshi’s 2024 case against the CFTC, the court acknowledged that properly regulated event contracts are commodity transactions, not gambling. But the court didn’t specifically address whether state gambling laws are preempted, leaving the question open.

State pushback

Several states disagree with the preemption argument and have taken action.

Nevada filed suit arguing that prediction markets on sports and entertainment events fall under its gaming regulatory authority. Nevada’s position is that state gambling law applies regardless of federal commodity regulation, at least for certain event categories. The case is ongoing as of February 2026.

New York has been the most aggressive. The New York State Gaming Commission issued guidance in 2025 stating that prediction markets offering contracts on events that resemble gambling (sports outcomes, entertainment events) may require a New York gaming license. New York also raised concerns about consumer protection, arguing that retail traders lack the sophistication to trade event contracts safely. Polymarket’s US platform has restricted access for some New York residents as a result.

Massachusetts sent cease-and-desist letters to at least one prediction market platform in late 2025, arguing that event contracts violate state consumer protection statutes. The state’s attorney general has signaled interest in pursuing enforcement actions.

Maryland regulators have questioned whether prediction markets require a state gambling license, though no formal enforcement action has been taken.

Where federal courts stand

The legal picture is genuinely unsettled. Two key issues remain unresolved.

First, does CFTC regulation of an exchange automatically preempt all state regulation of contracts traded on that exchange? The CFTC says yes. Several states say no, at least for contracts that look like traditional gambling. No appellate court has definitively ruled on this specific question for prediction markets.

Second, does the type of event matter? There’s a difference between a contract on the Federal Reserve’s interest rate decision (which looks like a financial derivative) and a contract on which celebrity couple breaks up next (which looks like a wager). Some states are trying to draw this line, arguing that preemption applies to financial events but not to entertainment or sports events.

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State-by-state breakdown

This table reflects the legal status as of February 2026. The situation is changing rapidly. Some states have pending legislation that could change their status within months.

State	Polymarket	Kalshi	Notes
Alabama	Available	Available	No specific prediction market legislation
Alaska	Available	Available	No specific prediction market legislation
Arizona	Available	Available	No specific prediction market legislation
California	Available	Available	No state-level restrictions, but some legislative interest
Colorado	Available	Available	No specific prediction market legislation
Connecticut	Restricted	Available	Pending legislation on event contract classification
Delaware	Available	Available	No specific prediction market legislation
Florida	Available	Available	No specific prediction market legislation
Georgia	Available	Available	No specific prediction market legislation
Hawaii	Restricted	Restricted	Pending bills to explicitly authorize or prohibit
Idaho	Available	Available	No specific prediction market legislation
Illinois	Restricted	Available	Regulatory uncertainty; Polymarket restricts access
Indiana	Available	Available	No specific prediction market legislation
Iowa	Available	Available	Iowa introduced legislation to explicitly authorize prediction markets
Kansas	Available	Available	No specific prediction market legislation
Kentucky	Available	Available	No specific prediction market legislation
Louisiana	Available	Available	No specific prediction market legislation
Maine	Available	Available	No specific prediction market legislation
Maryland	Available	Available	Regulators have raised questions but no formal action
Massachusetts	Restricted	Available	AG issued cease-and-desist guidance; enforcement risk
Michigan	Available	Available	No specific prediction market legislation
Minnesota	Available	Available	No specific prediction market legislation
Mississippi	Available	Available	No specific prediction market legislation
Missouri	Available	Available	No specific prediction market legislation
Montana	Available	Available	No specific prediction market legislation
Nebraska	Available	Available	No specific prediction market legislation
Nevada	Available	Restricted	Active lawsuit over state gaming jurisdiction
New Hampshire	Available	Available	No specific prediction market legislation
New Jersey	Available	Available	Some regulatory scrutiny but no restrictions
New Mexico	Available	Available	No specific prediction market legislation
New York	Restricted	Available	Gaming Commission guidance; Polymarket restricts some access
North Carolina	Available	Available	No specific prediction market legislation
North Dakota	Available	Available	No specific prediction market legislation
Ohio	Available	Available	No specific prediction market legislation
Oklahoma	Available	Available	No specific prediction market legislation
Oregon	Available	Available	No specific prediction market legislation
Pennsylvania	Available	Available	No specific prediction market legislation
Rhode Island	Available	Available	No specific prediction market legislation
South Carolina	Available	Available	No specific prediction market legislation
South Dakota	Available	Available	No specific prediction market legislation
Tennessee	Available	Available	No specific prediction market legislation
Texas	Available	Available	No specific prediction market legislation
Utah	Available	Available	Conservative gambling laws but no prediction market action
Vermont	Available	Available	No specific prediction market legislation
Virginia	Available	Available	No specific prediction market legislation
Washington	Available	Available	No specific prediction market legislation
West Virginia	Available	Available	No specific prediction market legislation
Wisconsin	Available	Available	No specific prediction market legislation
Wyoming	Available	Available	Crypto-friendly state legislation

Important caveat: “Available” means the platform does not currently block access from that state and no active enforcement action prevents trading. It does not guarantee that a state won’t change its position. “Restricted” means either the platform blocks access or active regulatory action creates legal risk for traders.

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Tax treatment for US traders

Prediction market profits are taxable income. How they’re taxed depends on the platform and the type of contract.

Kalshi: Section 1256 contracts

Kalshi reports trades on Form 1099-B. Contracts traded on Kalshi qualify as Section 1256 contracts under the Internal Revenue Code, which provides a 60/40 tax split: 60% of gains are taxed at the long-term capital gains rate (0%, 15%, or 20% depending on income), and 40% are taxed at the short-term rate (your ordinary income tax rate).

For a trader in the 35% ordinary income bracket, this blended rate works out to roughly 26.8% on prediction market gains — compared to 35% if all gains were taxed as ordinary income. On $50,000 in annual profits, that’s a difference of about $4,100 in taxes.

Kalshi also allows mark-to-market treatment at year-end. Open positions are treated as if they were closed on December 31, which simplifies accounting but means you pay taxes on unrealized gains.

Polymarket: less clarity

Polymarket does not issue 1099 forms for most users. The tax reporting burden falls on you. The IRS has not issued specific guidance on how to classify prediction market gains from DeFi protocols.

Tax professionals have offered several possible treatments. Some argue that USDC-denominated event contracts on Polymarket should qualify for Section 1256 treatment if the contracts are functionally identical to Kalshi’s. Others argue that because Polymarket (international version) isn’t a CFTC-regulated DCM, the contracts may not qualify for 1256 treatment and should instead be reported as short-term capital gains or ordinary income.

The safest approach is to consult a tax professional who specializes in crypto or derivatives taxation. At minimum, track every trade — entry price, exit price, date, and outcome — using a crypto tax tool like Koinly, CoinTracker, or TokenTax.

State income taxes

Some states (California, New York, New Jersey) tax capital gains at ordinary income rates, reducing the benefit of the federal 60/40 split. States without income tax (Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska, New Hampshire) provide a natural advantage for high-volume prediction market traders.

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Pending legislation to watch

Several states have introduced or are considering legislation that would directly affect prediction markets.

Iowa introduced a bill in the 2025–2026 session to explicitly classify prediction markets as legal financial instruments rather than gambling. If passed, Iowa would become the first state to create a prediction-market-specific regulatory framework.

New York has multiple bills pending. One would require prediction market platforms to obtain a state gaming license for certain event categories. Another would exempt CFTC-regulated platforms from state gambling law entirely. These bills represent opposite approaches, and neither had passed as of February 2026.

Illinois legislators have discussed prediction market regulation in the context of the state’s existing sports betting framework. The direction of Illinois legislation remains unclear.

Connecticut has a pending bill that would classify event contracts as a distinct category of financial product, subject to Connecticut’s Department of Banking rather than its gaming commission. This approach would effectively treat prediction markets as financial services, not gambling.

At the federal level, the most significant development is the CFTC’s ongoing rulemaking process for event contracts. The CFTC is expected to finalize rules in 2026 that would more clearly define which types of event contracts can be listed on regulated exchanges and under what conditions. This rulemaking could strengthen or weaken the federal preemption argument, depending on how broadly the CFTC defines its jurisdiction.

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Legal risks for traders

Even if prediction markets are legal where you live, several legal risks are worth understanding.

Platform risk

If a prediction market platform shuts down or loses its regulatory status, your funds could be locked. Kalshi’s DCM status and fund segregation requirements provide strong protection. Polymarket’s CFTC no-action letter provides less certainty — a no-action letter can be withdrawn with relatively little notice.

For funds on Polymarket’s international version, the protections depend on the jurisdiction. There’s no US regulatory backstop for international Polymarket accounts.

Changing state law

A state that currently allows prediction markets could restrict them. If your state passes legislation banning or heavily regulating event contracts, you might need to close positions and withdraw funds on a timeline you didn’t choose. This risk is highest in states with active regulatory scrutiny (New York, Massachusetts, Nevada).

Resolution disputes

When a prediction market contract resolves, the platform determines the outcome. On rare occasions, resolution is disputed. If you disagree with a resolution, your legal options depend on the platform. On Kalshi, you have access to CFTC dispute resolution processes. On Polymarket, dispute resolution depends on the underlying oracle system (typically UMA’s optimistic oracle), and your recourse as a trader is more limited.

Tax enforcement risk

If you fail to report prediction market gains, the IRS can assess penalties and interest. Kalshi reports to the IRS directly (1099-B), so the IRS knows about your Kalshi gains. Polymarket doesn’t report, but on-chain transactions are permanently recorded and increasingly subject to IRS analytics tools. The cost of not reporting exceeds the cost of paying the tax.

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Frequently asked questions

Are prediction markets gambling?
Legally, it depends on the jurisdiction. At the federal level, the CFTC classifies event contracts on regulated exchanges as commodity transactions, not gambling. Some state regulators disagree, particularly for contracts on sports and entertainment events. The legal distinction is evolving and hasn’t been definitively settled by the courts.

Can I trade prediction markets if I’m under 18?
No. Both Kalshi and Polymarket (US version) require identity verification confirming you are at least 18 years old. Polymarket’s international version has weaker age verification, but trading as a minor likely violates the platform’s terms of service and potentially applicable law.

What happens if prediction markets become illegal in my state?
You would likely be required to close your positions and withdraw your funds by a specified deadline. Platforms would restrict access from your state. Existing open positions would typically be allowed to resolve, but new trades would be blocked. This is what happened when some states restricted daily fantasy sports — operators gave users a window to wind down activity.

Do I need to report prediction market profits on my taxes?
Yes. All prediction market profits are taxable income in the United States, regardless of the platform. Kalshi provides tax forms. For Polymarket and other platforms, you are responsible for tracking and reporting your gains.

Is Polymarket’s international version legal for non-US users?
Polymarket’s international version operates outside US regulatory jurisdiction. Its legality depends on the laws of your country. In many jurisdictions, there are no specific laws governing participation in offshore prediction markets, but this varies widely. Check your local regulations.

Will prediction markets be federally legalized everywhere?
The trend is toward broader federal acceptance. The CFTC’s rulemaking process is expected to provide more clarity in 2026. However, the state vs. federal jurisdictional question will likely take years to fully resolve through legislation or court decisions.

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