Kalshi, the CFTC-regulated exchange for event contracts, is fighting a widening legal front after two federal appeals courts ruled that states may enforce their gambling laws against its sports outcome contracts, creating a circuit split that now governs where the platform can operate.

The stakes are measured in billions. Americans wagered $166.94 billion through legal sportsbooks in 2025, generating $16.96 billion in revenue and $3.71 billion in state taxes, according to American Gaming Association data. Fortune, citing the same market dynamics, reported that 35% of bettors say they now use traditional sportsbooks less, shifting activity to prediction markets such as Kalshi and Polymarket.

The core legal question is preemption: whether Kalshi's sports contracts are swaps under the Commodity Futures Trading Commission's exclusive federal oversight, as the company argues, or unlicensed sports bets dressed in financial-market language, as state regulators contend. The answer determines whether billions in wagers flow through a federally designated market that state gaming regulators cannot touch, or through licensed sportsbooks that pay state taxes.

The courts have split, and the momentum has turned against Kalshi. The Third Circuit previously sided with the company on preemption in a dispute involving New Jersey. On August 28, 2026, the Ninth Circuit ruled against Kalshi in a case involving Nevada. A month later, on September 28, 2026, a unanimous Sixth Circuit panel rejected Kalshi's appeal, clearing the way for Ohio and Tennessee to pursue enforcement.

Not every state has chosen confrontation. Montana and Kalshi mutually dismissed their lawsuits on September 17, 2026, pausing enforcement while further federal appellate review plays out.

State attorneys general are not the only plaintiffs. Kalshi also faces litigation over tribal gaming claims, including a case brought by the Ho-Chunk Nation in Wisconsin, as well as consumer class actions. The tribal claims add another layer: compacts between states and tribal nations grant exclusive gaming rights in exchange for revenue sharing, and prediction markets operating outside those compacts threaten that structure.

The operational consequences are immediate. Until the circuit split is resolved, Kalshi's ability to offer sports contracts may depend on which side of a circuit boundary a customer lives in. A bettor in a Third Circuit state faces a different legal regime than one in the Ninth or Sixth Circuit. That forces the company into jurisdiction-by-jurisdiction compliance decisions rather than a single national framework.

Traditional sportsbooks face a different calculus. If 35% of bettors are already pulling back from licensed operators, the competitive threat is measurable in customer behavior, not speculation. Licensed operators pay state taxes and comply with gaming regulations; prediction markets currently do neither under state law, which is precisely the asymmetry the litigation seeks to resolve.

States have the clearest financial stake. Every dollar of the $3.71 billion in annual state tax revenue that migrates to an unclassified market stops contributing to public coffers, which explains why attorneys general in Nevada, Ohio and Tennessee have pursued enforcement rather than wait for Congress or the CFTC to act.

Polymarket, grouped with Kalshi by Fortune as a platform reshaping American betting, faces the same definitional question. Any legal framework that emerges for Kalshi will likely shape how regulators treat other prediction-market operators offering sports contracts.

A circuit split of this kind — the Third Circuit on one side, the Ninth and Sixth on the other — is the sort of disagreement that frequently draws Supreme Court review. Whether Kalshi petitions for certiorari, and whether the Court takes the case, will determine whether the $166 billion sports wagering market runs through state-licensed books or federally regulated event contracts.