Americans wagered more on sports in 2025 than they spent on movies, music, and museums combined, according to Fortune, with total bets reaching roughly $166 billion. A growing share of that money is flowing to platforms that do not describe themselves as sportsbooks — and Kalshi, the most prominent among them, is now battling courts, state governments, and tribal nations over how its products should be classified.

A $166 Billion Market With a Classification Problem

The legal sports betting industry posted a landmark year. Data from the American Gaming Association shows that $166.94 billion was wagered through legal sportsbooks in 2025, producing $16.96 billion in revenue. Those bets also delivered $3.71 billion in tax receipts to state governments — a figure that explains why states are watching closely as the money begins to move elsewhere. The state-licensed market is itself young: it exists in its current form only because the Supreme Court struck down the federal sports betting ban in 2018, which opened the door for states to legalize, regulate, and tax wagering within their borders.

Fortune reported that 35% of bettors say they now use traditional sportsbooks less, citing prediction markets such as Kalshi and Polymarket as the reason they have changed how they place wagers.

The shift is significant because prediction markets are not classified as gambling at all. Billions of dollars in sports wagering are migrating into a regulatory space that state regulators cannot directly see.

Kalshi operates as a federally designated market for event contracts, including contracts tied to sports outcomes. The company argues that these contracts are swaps under the oversight of the Commodity Futures Trading Commission, not bets subject to state gaming law. States take a different view: in their reading, a contract that pays out when a team wins is a sports bet with a finance-flavored label.

Courts Split, With Momentum Turning Against Kalshi

The central legal question is preemption — whether federal commodities law overrides state gambling rules when it comes to Kalshi's contracts.

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

The result is a legal map that disagrees with itself. One federal appeals court has backed Kalshi on preemption, while two others have affirmed the power of states to enforce gambling laws against the company. That divide has structural consequences: each circuit court's rulings bind the federal district courts within its region, so the legality of the same contracts can differ depending on where a dispute lands.

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

Tribes and Consumers Join the Legal Queue

State attorneys general are not the only parties taking Kalshi to court. The company also faces litigation over tribal gaming claims, including a case involving the Ho-Chunk Nation in Wisconsin, as well as consumer class actions. Tribal gaming rests on its own legal foundation: under the Indian Gaming Regulatory Act of 1988, federally recognized tribes run casino operations under federal oversight and compacts negotiated with states, a framework that sits apart from both state licensing regimes and federal commodities regulation.

What It Means for Kalshi, Sportsbooks, and States

A circuit split is precisely the kind of disagreement that often invites the Supreme Court to weigh in. Until the conflict is resolved, Kalshi's ability to operate may depend on which side of a circuit boundary a customer happens to live on.

Traditional sportsbooks face a different concern. If 35% of bettors are already pulling back, the competitive threat is no longer hypothetical — it is showing up in customer behavior.

States have the clearest financial motive of all. Legal sports generated $3.71 billion in state taxes last year, and every dollar that migrates to an unclassified market is a dollar that stops contributing to that total.

Polymarket is worth watching as well. Fortune grouped it with Kalshi as one of the platforms reshaping how Americans bet, meaning any legal framework that emerges for one will likely color how regulators view the other.