North Carolina Moves to Tax Prediction Markets while Exempting Them from Gambling Regulations

North Carolina lawmakers have made strides in advancing a budget proposal that introduces a distinct tax on prediction market operators, while notably excluding these platforms from the state's gambling regulation framework.

The Senate endorsed the budget during a second reading with a decisive 37-19 vote, followed later by the House, which cast a 92-22 vote in favor. The budget now awaits final approval from both chambers before it reaches Governor Josh Stein’s desk for a signature.

Prediction Markets: Taxation without Regulation

If enacted, this budget would position North Carolina as only the second state to levy a tax on prediction market operators within a month, following Illinois, which instituted a similar measure in June. Illinois' tax law penalizes platforms like Kalshi and Polymarket, with Kalshi already initiating legal proceedings against it.

The proposed tax in North Carolina targets the net trading fee revenue generated by operators who facilitate trades within the state. Importantly, this plan keeps these platforms from being governed under the state’s gambling regulations, allowing them to continue operating under the auspices of the Commodity Futures Trading Commission (CFTC) without complying with state-specific gambling requirements such as rigorous know-your-customer checks or responsible gaming obligations.

Increased Tax for Online Sports Betting

In a dual-pronged approach, the same budget bill also aims to increase the tax on online sports betting, raising it from 18% to 23%. This change is expected to generate an additional $40 million in revenue, benefiting educational institutions such as the University of North Carolina and N.C. State University, which will now share in the generated wagering revenue.

This tax hike arrives just over two years after North Carolina's legalization of online sports betting and a few months subsequent to the market’s formal launch.

Gambling Loss Deductions Under Scrutiny

Debate among lawmakers also brought attention to the provisions concerning gambling-loss deductions. According to some Democratic lawmakers, a lack of clarity was evident in the language, highlighting that no “subdivision (1)” appeared in the bill’s text.

This section allows taxpayers to choose between the standard and itemized deductions, including a clause concerning wagering losses. This stipulation could have implications for how residents report gambling losses on their state income tax returns.

Separately Addressing Revenue Changes

An additional measure, known as Senate Bill 595, dubbed “Various Revenue Laws Changes,” is also positioned for action from the governor after successfully navigating the General Assembly.

This bill seeks to amend various aspects of legal online sports betting, specifically detailing how taxable revenue is calculated and how promotional credits are considered from a tax perspective.

A key point in this legislation is that promotional credits would contribute to gross wagering revenue once they are either returned to the operator or used for placing bets. Furthermore, it expands the scope of information the Department of Revenue can request from operators, allowing for annual records from players with winnings exceeding $2,000.

Starting January 1, 2027, operators will face a mandate to withhold state income tax linked to federal withholding on gambling winnings. Moreover, sportsbooks will be required to file returns outlining withheld amounts and ensure these funds are held in trust for the state’s revenue secretary.

The combination of the budget bill and Senate Bill 595 signifies a recalibration of several aspects of North Carolina’s betting tax framework, impacting everything from sports wagering to prediction market trading fees.

As these legislative moves unfold, North Carolina is poised to reshape its gambling landscape significantly while navigating the complex balance between taxation and regulation.

Featured image: R9 Media Photo Collective/Pexels

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