The U.S. wagering landscape is undergoing its most radical transformation since the Supreme Court overturned the federal ban on sports betting in 2018. A new breed of platforms—Kalshi, FanDuel Predicts, and DraftKings Predicts—is leveraging federal financial law to offer sports "trading" in nearly every state, even where traditional sportsbooks remain strictly illegal.
By framing wagers as "event contracts" rather than bets, these sites have opened a "backdoor" to national access that is currently pushing the U.S. legal system to its limits.
1. The Federal Loophole: Why "Trading" Isn't "Betting"
Traditional sportsbooks like the standard FanDuel or DraftKings apps are regulated by state gaming commissions. This is why they only operate in the ~38 states that have specifically legalized them.
Prediction markets, however, operate under the Commodity Futures Trading Commission (CFTC).
- Event Contracts: On these platforms, you aren't "betting against the house." You are buying a "Yes" or "No" contract from another person.
- Financial Exchanges: Because they are registered as Designated Contract Markets (DCMs), these platforms argue they are federal financial exchanges, just like the New York Stock Exchange.
- The 50-State Claim: Operators argue that federal law (the Commodity Exchange Act) preempts state gambling laws. This theory has allowed Kalshi and its peers to launch sports markets in massive non-legal states like California and Texas.
2. The Legal Tug-of-War (March 2026 Update)
The legality of this "backdoor" is currently being decided in over 20 different courtrooms across the country.
- Federal Preemption: Platforms argue the CFTC has "exclusive jurisdiction" over their products. A federal court in Tennessee recently sided with this view, granting an injunction to let Kalshi keep operating.
- The "Gaming" Defense: States counter that a football game is a "game," making these contracts "unlicensed gambling". Massachusetts and Ohio judges recently sided with states, ruling that sports contracts don't qualify for federal protection.
- Criminal Escalation: In a major March 2026 development, Arizona became the first state to file criminal charges against Kalshi, alleging it is running an illegal gambling house.
- The "Prediction Markets Are Gambling Act": Bipartisan legislation was introduced in Congress in late March 2026 to explicitly ban sports betting on these federal exchanges and return power to the states.
3. The "60/40" Tax Advantage
For high-volume traders, the biggest draw isn't just access—it’s the potential for a significantly lower tax bill.
- Section 1256 Treatment: If these contracts are classified as regulated derivatives, they benefit from a 60/40 split:
- 60% of gains are taxed at the lower Long-Term Capital Gains rate (max 20%).
- 40% are taxed at the Short-Term rate (ordinary income).
- This creates an effective federal rate of roughly 26.8%, compared to up to 37% for traditional gambling winnings.
- The "90% Loss Cap" Trap: Under the OBBB Act of 2026, traditional gamblers can now only deduct 90% of their losses against their winnings. Prediction market users argue they are exempt from this cap because they are trading "financial instruments," not "wagering".
- IRS Uncertainty: The IRS has yet to issue a formal ruling. Currently, many traders are taking the aggressive "Section 1256" stance but filing a Form 8275 to disclose the position and avoid penalties if the IRS eventually disagrees.
Also check out our latest post to see why the pros are moving from the sports books to Kalshi.
📍 Where Is It Legal? (State-by-State Status)
As of March 30, 2026, your ability to use these platforms depends entirely on your location.
⚖️ Legal status is evolving rapidly and may change based on ongoing court rulings and legislation. Always verify current laws before participating.
Frequently Asked Questions (FAQ)
1. Is it actually legal to use Kalshi or FanDuel Predicts in states like California or Texas?
Technically, yes—for now. Because these platforms are regulated by the federal CFTC rather than state gaming boards, they operate under "federal preemption." This means they argue federal law overrides state-level sports betting bans. However, this is being challenged in several state courts (like Nevada and Arizona), so the legal status can change week-to-week.
2. How are "event contracts" different from a standard sports bet?
In a standard sportsbook, you bet against "the house" (the bookie) at set odds. In a prediction market, you are trading with other people. You buy a contract (e.g., "Will the Lakers win tonight?") for a price between $0.01 and $0.99. If you’re right, the contract pays out $1.00. It functions more like a stock market than a casino.
3. Do I have to be 21 to use these platforms?
One of the biggest shifts is the age requirement. While traditional sports betting usually requires you to be 21, many CFTC-regulated prediction markets allow users 18 and older to open accounts, as they are classified as financial trading platforms.
4. How does the "60/40" tax rule work for my winnings?
If these wagers are legally classified as Section 1256 contracts, 60% of your gains are taxed at the lower Long-Term Capital Gains rate, and 40% are taxed at your ordinary income rate. This can save you significantly compared to traditional gambling winnings, which are taxed entirely as ordinary income (up to 37%).
5. Can I deduct my losses on these sites?
This is a major advantage being debated in 2026. Traditional gamblers are now limited by the OBBB Act, which caps loss deductions at 90% of winnings. However, because prediction markets claim to be financial exchanges, traders argue they can deduct 100% of their losses, just like losing money on a stock trade.
6. What happens if my state bans these sites tomorrow?
Usually, if a state issues a "cease and desist" or a court grants an injunction (as recently seen in Nevada), the platform will geo-block users in that state. Typically, you are allowed to withdraw your existing funds, but you will be barred from placing new "trades" until the legal issue is resolved.