Illinois Prediction Market Tax: Do Traders Pay It?

No. The Illinois prediction market tax is not a tax on traders. It's a 1.75% to 3.5% transaction fee on licensees, and after an October 2026 federal court ruling the parties agreed it can't be enforced against CFTC-registered exchanges and intermediaries for now. What Illinois traders do owe is the ordinary 4.95% state income tax on their results, and under gambling treatment that can be far higher than the net profit suggests.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed. This article explains the options and the sources behind them; a tax professional can tell you which position fits your situation.

What the fee is

Illinois's fiscal 2027 budget amended its Sports Wagering Act, 230 ILCS 45/25-90. According to Holland & Knight's analysis, section 25-90(d-20) adds a transaction fee keyed to exchange wagers conducted by a licensee: 1.75% on a licensee's first 5 million exchange wagers in a fiscal year, and 3.5% after that.

The obligation sits on the licensee. Nothing we found imposes the fee on individual customers. Whether a platform passes a cost through to customers would be a business decision, and we found no published Illinois fee from Kalshi or another exchange.

What the court did

On October 2, 2026, in Coinbase Financial Markets v. Raoul, consolidated with cases brought by the United States and KalshiEX, Judge Martha Pacold of the Northern District of Illinois held that Illinois's sports wagering licensing regime, as applied to exchange-traded event contracts, is likely preempted by the Commodity Exchange Act.

The court held back the fee question for more briefing. On October 8, per Holland & Knight, the parties told the court further briefing was unnecessary, because the fee applies only to licensees, so enjoining the licensing requirement also disables the tax.

The broader question remains open: whether a state could tax federally regulated exchanges through a different law, one that doesn't depend on a license. A preliminary ruling isn't the end of a case, and it can be appealed.

A separate repeal bill, HB 5811, has been proposed. We found no sign it has passed.

What you actually owe in Illinois

Illinois taxes individuals at a flat 4.95%. The IL-1040 instructions start from federal adjusted gross income on line 1. That one fact drives everything else.

The last row is the trap. Gambling losses are an itemized deduction on federal Schedule A, which comes after AGI. So they never reduce the number Illinois starts from. Illinois's form has no general itemized deduction, as the instructions show: it starts from AGI, then applies additions, subtractions and exemptions. We found no subtraction for gambling losses in the 2025 instructions. Confirm this with a preparer for your year.

Worked example

An Illinois resident has $20,000 of winning markets and $15,000 of losing markets, a $5,000 net profit.

That's before federal tax, which under gambling treatment has its own 90% limit. The more volume you trade, the wider the gap. A trader with $200,000 of winnings and $200,000 of losses has no profit, yet $9,900 of Illinois tax under gambling treatment.

Will Illinois issue guidance?

We found no Illinois Department of Revenue guidance on event contracts. Illinois follows the federal AGI you report, so your federal position decides your state number. If you use capital treatment federally, Illinois follows.

Residents and non-residents

Illinois taxes residents on their income from all sources. If you moved during the year, a part-year schedule applies. The reciprocal agreements Illinois has with some neighboring states cover wages, and the instructions note they don't apply to other income such as Illinois lottery winnings. Non-residents should check how their own state treats the income.

Other Illinois items

• Estimated payments. Illinois has its own estimated system, so a big year can need state payments too.
• Interest. Kalshi interest is in federal AGI, so it's taxed at 4.95%.
• Other states. The rules differ widely. See prediction market state taxes.

What to do

1. Ignore the headlines about a prediction market tax when you do your return. It isn't a line on your IL-1040.
2. Check your platform's fee disclosures. If a new charge appears, treat it as a trading cost in your records.
3. Choose your federal treatment knowing the Illinois effect. For high-volume traders, gambling treatment has a state cost as well as a federal one.
4. Keep gross and net figures by market, so you can model both.

Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. Multiply each row's AGI effect by 4.95% for a rough Illinois number.

For the federal choice, read gambling vs capital gains for event contracts.

FAQ

Does Kalshi charge Illinois users an extra tax?

We found no published charge. Check your own trade confirmations and Kalshi's current fee schedule.

Does the fee apply to Polymarket?

It's described as applying to exchange wagers by licensees. The status of any exchange depends on licensing and the litigation. It isn't a tax on you either way.

Does Illinois tax gambling winnings?

Yes. Winnings are in federal AGI, and Illinois starts from that number.

Can Illinois traders deduct gambling losses?

Federal Schedule A losses don't reduce federal AGI, and we found no Illinois subtraction for them.