A federal judge has sided with Kalshi and Coinbase, blocking Illinois from enforcing state-level gambling regulations on prediction markets while leaving the door open for potential taxation.
By Friday afternoon. the high-stakes battle between Illinois regulators and the booming prediction market industry reached a critical juncture in a Chicago federal courtroom. Judge Martha Pacold issued an injunction that effectively blocks the state from treating platforms like Kalshi and Polymarket as traditional sportsbooks.
For months. the conflict has pitted the state’s desire to oversee and tax these emerging platforms against the industry’s claim that they operate under the exclusive purview of federal authorities. The platforms allow users to trade “yes” or “no” contracts on events ranging from Major League Baseball post-season outcomes to local weather patterns.
Judge Pacold’s ruling hinges on the fundamental distinction between sports betting and prediction trading. Because users on these platforms trade against one another rather than against a “house. ” they do not fit the traditional definition of gambling under Illinois law. “Many of the financial instruments at issue are likely swaps as defined by the Commodity Exchange Act—they just happen to be swaps that people find entertaining and fun. ” Pacold wrote in her decision. “Under the Act and precedent interpreting it, some Illinois law is likely preempted.”.
The decision serves as a significant win for Kalshi and its cryptocurrency partner. Coinbase. which initiated the lawsuit this past June after Illinois Gaming Board Administrator Marcus Fruchter issued cease-and-desist letters in April to those firms. along with Polymarket. Crypto.com. and Robinhood. The state had argued these companies were engaging in illegal gambling. In the wake of the ruling. Kalshi founder Luana Lopes Lara took to social media to characterize the judge’s decision as “beautiful.”.
While the injunction halts state efforts to dictate who can use the platforms and what can be sold—including an Illinois mandate that would have forced companies to block traders under 21 and restrict sports-related offerings—the financial aspect of the dispute remains unsettled. Judge Pacold withheld a decision on whether Illinois can levy taxes on the transaction fees generated by these markets.
Lawmakers in Springfield included these projected taxes as part of the legislation passed alongside a $56 billion state budget earlier this year. However, anticipating a protracted legal fight, the state did not count on that revenue in its core budget projections.
“Taking a cut of Kalshi and Coinbase’s profits, without more, might not pose the same conflict as regulating an entire market,” Pacold noted. The court has left the door open for further arguments regarding that specific tax framework.
This legal friction is not unique to Illinois. As states across the country grapple with how to classify these rapidly evolving financial instruments. the conflict is widely expected to eventually reach the U.S. Supreme Court. Meanwhile. the executive branch in Illinois remains cautious; Governor JB Pritzker previously signed an executive order barring state employees from using insider information to participate in prediction markets. A spokesperson for the office of Illinois Attorney General Kwame Raoul declined to comment following the ruling.
Kalshi Polymarket Illinois prediction markets Judge Martha Pacold Coinbase gambling regulation Commodity Exchange Act