North Carolina lawmakers approved a new tax on prediction market operators as part of the state’s sweeping budget bill, making it the third state, after Kentucky and Illinois, to enact a tax targeting federally regulated event contract platforms.
On Thursday, the House adopted the budget conference report containing the tax provision on third reading by an 88-21 vote, and the Senate followed with a 35-10 vote. The General Assembly’s approval sends the budget to Gov. Josh Stein for his consideration.
The prediction market provision creates a 6% tax on prediction market operators’ net trading fee revenue tied to North Carolina customers. The tax is slated to take effect Jan. 1, 2027.
Prediction market tax draws debate after late budget addition
The prediction market tax drew repeated criticism during floor debate after appearing in the budget conference report rather than moving as a standalone bill.
The budget itself was a must-pass package after more than a year of negotiations between House and Senate leaders. North Carolina was the only state still operating without a new budget, giving lawmakers little room to separate individual policy disputes from the broader spending deal.
During Thursday’s Senate debate, Sen. Michael Garrett asked Senate budget chair Brent Jackson who requested the prediction market provision and whether the language came from legislative staff or an outside party. Jackson said he could not answer those questions, but said the provision came from the House and was added after Senate budget chairs had finished their work.
Rep. Pricey Harrison also criticized the provision Thursday, saying the prediction market language deserved separate committee discussion rather than being included in the budget. She argued that taxing prediction markets effectively legitimizes the platforms and allows them to operate in North Carolina without the regulatory framework applied to licensed sportsbooks.
“I think this was a poor decision to include this in the budget,” Harrison said. “I think this should have been more thoughtful, and we should have considered all the ramifications.”
Sen. Julie Mayfield raised similar concerns during Wednesday’s second-reading debate, questioning why the budget would raise the sports betting tax from 18% to 23% while giving prediction market platforms a much lower rate applied only to net revenue.
“We have now created a new framework for these prediction markets, but they have a different and much lower tax rate, and that tax rate is only applied to their net proceeds, not their gross proceeds,” Mayfield said. “I don’t know who their lobbyists are, but congratulations. I mean, that’s just rich. That is absolutely rich. Makes no sense what we’re doing there.”
Garrett also warned Thursday that sportsbook operators could compare the two frameworks and shift activity into prediction markets to avoid North Carolina’s higher sports betting tax and licensing fees.
“The sports betting companies are going to look at these two frameworks side by side, and they’re going to make the obvious business decision,” Garrett said. “They’ll pocket that million dollar license fee that they no longer owe. They will pay a significantly lower tax on a much smaller number.”
What North Carolina’s prediction market tax does
The prediction market provision appears in the revenue section of the budget, where lawmakers created a new Article 2F titled “Tax on Prediction Markets.”
Under the bill, prediction market operators must pay a 6% tax on net trading fee revenue apportioned to North Carolina. The tax applies when revenue is tied to a trader who is both domiciled in North Carolina and physically present in the state at the time of the trade.
The bill defines net trading fee revenue as trading fees collected by the operator, minus certain exclusions. Those include compensation paid to brokers or market makers, promotional credits or rebates, clearing or platform fees paid to a derivatives clearing organization, and withdrawal fees. In other words, the tax applies after those costs are deducted, rather than to all trading fees collected by the operator.
The budget also includes language aimed at separating the tax from state licensing or gaming regulation. It says a prediction market platform approved by the CFTC may operate in North Carolina and that the new tax article does not require a license, registration, permit or other state authorization to offer event contracts.
How the state prediction market taxes differ
Kentucky and Illinois enacted prediction market taxes before North Carolina, though the three states use different approaches. Kentucky’s tax is also scheduled to begin Jan. 1, while Illinois’ framework was set to take effect July 1 before the state agreed not to enforce it while the company’s preliminary injunction motion against Kalshi is pending.
Kentucky was the first state to enact a prediction market tax, creating a 14.25% excise tax on prediction market operator transaction fees. The law also states that imposing the tax should not be interpreted as authorizing, licensing or otherwise making prediction markets legal in the state.
Illinois took a more direct approach to sports trading. Rather than taxing operator revenue, the law imposes a 1.75% transaction tax on each sports-related exchange wager, increasing to 3.5% after a licensee exceeds five million exchange wagers in a fiscal year. It also amends the state’s Sports Wagering Act to require prediction market operators offering sports event contracts to obtain an Illinois sports wagering license, effectively placing those markets under the state’s gaming framework.
North Carolina is different because it treats legality and taxation as separate issues. The budget expressly allows CFTC-regulated prediction market platforms to operate while imposing a 6% tax on their revenue, making it the clearest attempt yet to distinguish taxation from regulation.
Legal challenges likely to follow
North Carolina’s tax enters a legal landscape already shaped by lawsuits over state authority.
In Kentucky, the Coalition for Fair Markets, whose members include Kalshi, Crypto.com and Polymarket US, sued to block the state’s prediction market tax, arguing it unlawfully targets federally regulated event contract platforms. Days later, the CFTC filed its own lawsuit against Kentucky, contending the state’s tax and related enforcement efforts interfere with the agency’s exclusive authority over derivatives markets.
Illinois has followed a different litigation path. The CFTC sued the state earlier this year over its efforts to apply gambling laws to prediction markets, but that case predated Illinois’ new tax. After lawmakers approved the tax-and-licensing framework, Kalshi filed a separate lawsuit challenging the law, arguing Illinois cannot require federally regulated prediction market operators to obtain a state sports wagering license or comply with the state’s gaming laws. Illinois later agreed not to enforce the challenged law against Kalshi while the court considers the company’s preliminary injunction request.
Whether North Carolina will face similar litigation remains to be seen. But the lawsuits in Kentucky and Illinois illustrate the arguments likely to emerge as more states seek to tax prediction markets.
