Illinois tax authority survives as federal preemption cuts around it

Judge Martha Pacold blocked Illinois from enforcing its age restrictions, geographic limits, and trading rules against Kalshi and Coinbase last week, finding those measures likely preempted by the Commodity Exchange Act. She left the tax standing.

That distinction is doing more work than most of the coverage has noticed.

The injunction Pacold granted is real and significant — the ruling that sports event contracts are likely swaps under federal law is the clearest judicial statement of that position to date, and it matters for how the Ninth Circuit and eventually the Supreme Court will approach this question. But the tax survives because Pacold drew a line between regulating a market and taking a share of one. "Taking a cut of Kalshi and Coinbase's profits, without more, might not pose the same conflict as regulating an entire market," she wrote. That sentence is the one Illinois will build its next argument around.

The prediction market industry has framed this ruling as a breakthrough, and in one sense it is. The G2E panel finding from earlier this cycle — 38 losses in 43 state rulings — makes any federal win look like a reversal of momentum. But momentum and legal resolution are different things, and the parties still have to submit a proposed injunction consistent with Pacold's opinion by October 29. The underlying cases are unresolved.

More telling is what Pacold did not say. She did not find that state taxes are preempted. She noted the CFTC has never ordered Kalshi to remove its contracts, and she leaned on that fact to support preemption of the regulatory restrictions. But the tax question was held open precisely because a revenue measure carries a different legal character than a conduct regulation. Illinois Gaming Board Administrator Marcus Fruchter sent cease-and-desist letters to four platforms in April. The cease-and-desist authority is now blocked. The taxing authority is not.

At the Predict 2026 conference in New York this week, CFTC General Counsel Tyler Badgley described the litigation as falling into four categories: platforms suing states, states bringing enforcement actions including criminal indictments, the CFTC seeking injunctions, and everything else. Arizona's 20-count indictment against Kalshi from March sits in that second bucket, currently frozen by a temporary restraining order from April. That case is still live. The Wisconsin federal judge who denied the CFTC a preliminary injunction is still on the board.

What Pacold has actually done is sharpen the boundary rather than settle it. States cannot tell Kalshi what to sell, where to sell it, or to whom — at least not yet, not in Illinois, not without surviving a preemption challenge. But they can plausibly tax the transaction. That is a narrower prohibition than the industry is describing, and a wider permission than Illinois expected to retain.