Supreme Court Review Threatens Prediction Market Tax Exemptions

Prediction market operators face an imminent test before the US Supreme Court that could determine whether their sports and event contracts trigger federal wagering taxes ¹. State responses in appeals involving Robinhood, Kalshi, and Crypto.com are due on Dec. 7, setting up potential rulings over whether their offerings represent regulated commodities or taxable gambling ¹.

Robinhood asked the Supreme Court on Sept. 10 to review an appellate loss in the Ninth Circuit against the Nevada Gaming Commission ¹. Crypto.com's derivatives unit filed a similar petition on Sept. 11 following its own legal defeat in Nevada ¹. Meanwhile, New Jersey petitioned the court on Sept. 2 to overturn Kalshi's victory in the Third Circuit ¹. All three matters carry a synchronized response deadline of Dec. 7 ¹. The disputes arrive amid broader jurisdictional friction examined in how prediction markets are regulated in the US.

Unremitted Excise Taxes and State Preemption

The court battles carry direct tax implications for event contract platforms ¹. Under Section 4401 of the Internal Revenue Code, authorized wagers face a 0.25% federal excise tax ¹. Robinhood, Kalshi, and Crypto.com have not collected or remitted this wagering excise tax, arguing that their platforms match peer-to-peer trades rather than acting as a house taking taxable wagers ¹.

Robinhood disclosed in an Oct. 28 regulatory filing that Robinhood Derivatives has not collected federal excise tax on event contracts because it considers them exempt ¹. The company warned in the filing that an adverse determination could prove material and render event contracts uneconomical ¹. Operators have also made local concessions to stave off enforcement; Robinhood agreed on Oct. 26 to suspend new sports contracts in Ohio while its legal challenges proceed ¹.

While the Supreme Court is addressing whether state gambling laws apply to prediction markets rather than ruling directly on tax code preemption, a ruling favoring state jurisdiction would weaken the platforms' stance that their products are exempt from gambling classifications ¹. New York University tax researchers cited in the proceedings noted that even if Commodity Futures Trading Commission regulations pre-empt state gambling laws, federal tax duties are not necessarily superseded ¹.