North Carolina lawmakers are advancing a new tax on prediction market operators as part of the state’s sweeping budget bill, a provision that would make North Carolina the third state to enact a tax targeting federally regulated event contract platforms.
The Senate was debating the budget conference report Wednesday afternoon, while the House was in recess and expected to take up the measure later in the day. If approved by both chambers, the budget would head to Gov. Josh Stein. The prediction market provision creates a 6% tax on prediction market operators’ net trading fee revenue tied to North Carolina customers.
If enacted, the tax would take effect Jan. 1, 2027.
North Carolina creates prediction market framework
Kentucky and Illinois have already enacted prediction market taxes in different forms. Kentucky’s previously enacted prediction market tax is also scheduled to begin Jan. 1, while Illinois’ prediction market tax and licensing framework took effect Wednesday.
North Carolina’s version is narrower than Illinois’ licensing-based approach and less aggressive than Kentucky’s transaction-based tax. The NC provision also expressly says prediction market platforms registered with the Commodity Futures Trading Commission may operate lawfully in the state, a notable distinction in a state-by-state fight where lawmakers have typically avoided blessing the legality of the underlying markets.
The provision drew some pushback during Senate debate Wednesday. Sen. Julie Mayfield questioned why the budget would increase taxes on sportsbook operators while giving prediction market platforms a 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 [than sportsbooks], 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.”
What North Carolina’s prediction market tax does
The prediction market provision appears in the revenue section of the budget, where lawmakers would create 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 several 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.
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.
Prediction market tax moved through budget bill
The prediction market tax did not advance as a standalone prediction market bill. Instead, lawmakers added it to the final budget agreement, a sweeping spending package released after more than a year of negotiations between House and Senate leaders.
That approach mirrors a broader state trend. Kentucky lawmakers included the prediction market tax in a larger tax bill. Illinois added its tax-and-licensing framework through budget legislation. Minnesota tucked its broader prediction market ban into an omnibus public safety package.
The strategy can move prediction market provisions through the legislature more quickly than standalone bills, while also limiting the opportunity for extended public debate over how states should treat CFTC-regulated event contracts.
How the state prediction market taxes differ
The three state tax laws take different approaches to both taxation and the legal status of prediction markets.
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.
Whether North Carolina will face similar litigation should the budget pass with the prediction market provision 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.
