AGA Reports States Forgo Over $1 Billion in Tax Revenue from Prediction Market Growth

The American Gaming Association has released new figures indicating that states across the country have missed out on more than $1 billion in tax revenue because prediction market platforms continue to operate without paying state gaming taxes, and these platforms function in ways that mirror sports betting activity. The estimate arrives in May 2026 as lawmakers and regulators continue to examine how lightly regulated markets fit into the broader expansion of legal wagering options nationwide.

Prediction markets such as Polymarket and Kalshi allow users to trade contracts on event outcomes including sports results, elections, and other real-world developments, yet these platforms currently avoid the licensing requirements and tax obligations that apply to state-regulated sportsbooks. The AGA describes the situation as one where these markets serve as backdoor sports betting channels that divert potential tax dollars away from state budgets while still attracting substantial user participation.

How the Revenue Gap Emerges

States that have legalized and taxed sports betting collect percentages of handle from licensed operators, but prediction markets fall outside those frameworks because they structure transactions as event contracts rather than traditional wagers, and this distinction leaves them exempt from gaming taxes in most jurisdictions. Data compiled by the AGA shows the cumulative shortfall exceeding $1 billion as trading volumes on these platforms have grown rapidly over recent years, and the lost revenue includes both direct taxes on betting activity plus associated fees that regulated operators pay.

Those who have tracked the expansion note that platforms like Polymarket and Kalshi have drawn increasing attention from sports bettors seeking alternatives, and the absence of state-level taxation means the economic benefits stay with private companies instead of flowing into public coffers. The report highlights ongoing tensions between established gambling operators that comply with state rules and newer market entrants that operate under different regulatory interpretations.

State Responses and Industry Context

Multiple states have begun reviewing their approaches to prediction markets, and some lawmakers have introduced measures aimed at bringing these platforms under gaming oversight so they would contribute tax revenue similar to sportsbooks. The AGA points out that the current structure creates an uneven playing field where regulated companies shoulder tax burdens while prediction markets capture market share without equivalent obligations.

According to the association's analysis, the revenue loss affects states that have already legalized sports betting as well as those still considering legalization, because prediction markets draw activity regardless of local laws. Observers note that the situation has intensified as overall U.S. sports betting volumes continue to climb, yet a portion of that activity bypasses traditional tax collection channels entirely.

The American Gaming Association has framed the issue around sports event contracts specifically, emphasizing that contracts tied to athletic outcomes operate in direct competition with licensed sportsbooks. This perspective aligns with statements from regulated operators who argue that all platforms offering sports-related contracts should face consistent regulatory treatment and tax responsibilities.

Looking Ahead for Regulators

Federal and state officials continue to evaluate how prediction markets should be classified, and discussions in May 2026 reflect broader debates about whether existing commodity trading exemptions should extend to platforms that include sports outcomes. Several states have signaled interest in legislation that would require prediction market operators to obtain gaming licenses if their contracts involve sporting events, which would bring them into the tax system that currently applies to sportsbooks.

The AGA estimate serves as one data point in these conversations, providing lawmakers with a concrete figure to consider when weighing policy options. Figures from the report indicate the lost revenue has accumulated across multiple states simultaneously, and the total continues to grow as platform usage expands.

Conclusion

The AGA's assessment underscores how prediction markets have created measurable revenue shortfalls for states while operating alongside the regulated sports betting industry. As platforms like Polymarket and Kalshi maintain their current structures, the gap between taxed and untaxed activity persists, and state governments face ongoing questions about how to address the distinction. The situation remains fluid as regulators and industry participants monitor developments through 2026 and beyond.