Sports Event Contracts: How Prediction Markets Are Quietly Draining State Gaming Tax Dollars

Walk into any regulated U.S. sportsbook today and you’ll see a familiar value exchange: fans place bets, operators pay taxes and fees, and states and tribes use that money to fund schools, roads, public safety, and community programs.

Now compare that to a prediction-market platform offering “sports event contracts” — binary trades on NFL point spreads or game outcomes dressed up as financial instruments. The fan experience is the same. The risk is the same. The economic exposure is the same.

But there’s one crucial difference: the tax money disappears.

According to the American Gaming Association’s own running counter, states have already lost more than $150 million in gaming tax revenue since prediction markets began offering sports event contracts without going through state and tribal licensing.

That’s not a rounding error. That’s real money that should be flowing into state budgets and tribal communities — but instead is being siphoned off under the guise of “financial innovation.”

The Core Problem: Same Bet, Different Wrapper, No Tax

Prediction-market platforms argue that sports event contracts are regulated financial products under the Commodity Futures Trading Commission (CFTC), not gambling under state law. In their telling, a “Yes/No: Chiefs win by 3+ points” contract is more like trading oil futures than placing a bet at a sportsbook.

But look at the mechanics:

A user stakes money on a future sports outcome.
The contract settles based purely on the game’s result.
If the prediction is correct, the user profits; if not, they lose their stake.

To the customer — and to most voters — that’s not a hedge or a financial instrument. It’s a sports bet.

Polls reflect that reality. Most Americans see these contracts as gambling and believe they should be regulated accordingly — by states and tribes, not by a federal commodities regulator.

And yet, when these bets are routed through federal derivatives regulation instead of state gaming laws, the platforms avoid exactly what licensed sportsbooks are required to deliver:

State and tribal gaming taxes
License fees and compliance costs
Contributions to problem-gambling funds and community programs

In other words, this isn’t just regulatory arbitrage — it’s tax arbitrage at scale.

Following the Money: How Big Is the Tax Hole?

Let’s be blunt: if these sports contracts were taxed like traditional sports betting, very little of this debate would exist.

Analyses of market volume suggest some platforms have generated billions of dollars in trading activity since introducing sports event contracts. On certain exchanges, sports outcomes now make up a majority of trading volume.

If that same volume were handled through licensed books subject to state tax, a meaningful portion would be flowing into public budgets. Instead, it flows untaxed (at the state level) through venues that were never designed to be the primary regulators of gambling.

To call this “innovation” is generous. It’s closer to a multi-state tax workaround — one that leaves local governments, tribes, and regulated operators holding the bag.

Federalism and the Nevada Wake-Up Call

The friction here isn’t just about product design; it’s about who gets to decide what counts as gambling — and who gets the tax revenue.

In a landmark decision, a federal judge in Nevada ruled that prediction-market sports contracts fall under Nevada’s gaming laws. The court dismantled an injunction that previously protected Kalshi, one of the largest platforms, from state enforcement actions.

The judge’s reasoning was clear: allowing CFTC-regulated exchanges to bypass state authority would undermine the federalism framework that has defined U.S. gambling regulation for generations.

Elsewhere, states such as Maryland and New Jersey have taken steps to restrict or clarify the legality of event-contract wagering, reinforcing the message that sports bets — regardless of labeling — belong under state and tribal jurisdiction.

This isn’t an academic fight. It’s a fundamental question:

Do we allow a federally regulated derivative wrapper to nullify state tax policy and voter intent on gambling?

From where I sit — after more than 30 years in gaming, regulation, and tribal compacts — the answer should be a firm “no.”

Why Tax Leakage Matters to States, Tribes, and the Industry

When you strip this down, the impact of sports event contracts is felt in three overlapping ways:

1. States Lose Direct Revenue

Taxes on legal sports betting now fund everything from education and transportation to public safety and responsible-gaming programs. Every dollar that migrates from a licensed sportsbook to an untaxed sports-event contract is a dollar that doesn’t:

Repair a road
Support a teacher
Fund addiction treatment
Strengthen regulatory capacity

Allowing this leakage undermines the very purpose of regulated sports betting — ensuring that gaming benefits the public good.

2. Tribes Lose Sovereignty and Economic Benefits

For many tribes, regulated gaming is not just a business — it’s an essential economic engine and a sovereign right embodied in decades of negotiated compacts.

When sports betting migrates to federally overseen event contracts:

Tribal sports-betting compacts are effectively bypassed.
Tribes lose both economic participation and regulatory voice in sports wagering that occurs within their traditional market footprints.

No platform should be allowed to sidestep sovereign compacts through a semantic rebranding of bets.

3. Licensed Operators Lose on an Uneven Playing Field

Traditional operators are paying:

Licensing fees
State and local taxes
Ongoing compliance costs
Responsible-gaming and AML investments

Prediction-market platforms offering sports bets through event contracts pay none of those state-level costs — yet still compete for the same customers.

That’s a classic free-rider problem: one group pays the bill for consumer protections and community benefits while another competes without contributing.

The Public Understands Exactly What’s Happening

It’s easy, inside the policy bubble, to get caught up in the legal jargon — “designated contract markets,” “event derivatives,” “CFTC oversight.”

But ordinary Americans have already cut through the noise: they overwhelmingly believe these products are sports bets, not financial instruments, and should be regulated — and taxed — accordingly.

The American Gaming Association has put this in plain language: platforms offering sports event contracts “disregard vital consumer protections, generate no benefits for local communities, and threaten the integrity of games.”

And the most visible impact — the tax drain — is growing daily.

A Complicating Factor: When Regulated Operators Join the Loophole

One of the most troubling developments of the past year has been seeing major U.S. operators move closer to the prediction-market model. DraftKings and FanDuel, two of the largest names in regulated gaming, have already positioned themselves to offer event-contract products — and even exited industry associations over disagreements on the issue.

Their rationale is straightforward:

Sports event contracts are attracting enormous volume.
If competitors are allowed to offer these products without paying state taxes, no operator wants to be left behind.

But this only accelerates the erosion of state gaming revenue and increases the risk of a two-tiered system where traditional sportsbooks subsidize public benefits while contract markets siphon off profits without contributing.

Policy Solutions: Closing the Tax Loophole Without Stifling Innovation

Prediction markets have legitimate applications — from elections to economic forecasting. But sports betting is not one of them.

To protect state budgets, tribal sovereignty, and regulatory integrity, policymakers should consider:

1. An Economic-Substance Test

If a contract is:

settled entirely by a sports outcome, and
marketed as a way to profit from that outcome,
then it should be classified as sports betting for the purposes of taxation and licensing.

2. State & Tribal Tax Parity

Event contracts tied to sports outcomes should be taxed at the same rate as sports wagering in the state where the consumer is located.

3. Respect for Tribal Compacts

Any federal or CFTC guidance should explicitly affirm that sports event contracts cannot bypass negotiated tribal compacts.

4. Unified Consumer-Protection Standards

If it looks like gambling, it should carry gambling protections:

age verification
self-exclusion
responsible-gaming tools
geolocation controls
AML/KYC obligations

Without these guardrails, the risks extend far beyond tax loss.

The Bottom Line: This Isn’t Innovation — It’s Avoidance

Sports event contracts are not a breakthrough in market design. They are a clever way to extract value from sports wagering demand without paying the taxes that states and tribes rely on — and that licensed sportsbooks already shoulder.

When I look at this space, I see:

Public budgets lighter by more than $150 million, and growing.
Tribal communities losing participation in markets they helped build.
Licensed operators asked to compete on uneven terms.
A regulatory gap that leaves consumers and the integrity of sport exposed.

At some point, the industry and policymakers must stop pretending this is a technical debate.

If it’s a sports bet, it should pay sports-betting taxes.

Until tax parity is enforced — and sports event contracts are regulated for what they functionally are — the counter tracking lost tax dollars will continue to climb, and the long-term consequences will be felt in classrooms, clinics, tribal communities, and state budgets across the country.