Kalshi Loses Sixth Circuit Appeal: What the Circuit Split Means for Prediction Markets

A unanimous three-judge panel of the U.S. Court of Appeals for the Sixth Circuit has ruled that Kalshi's sports event contracts do not qualify as "swaps" under the Commodity Exchange Act (CEA), stripping the prediction markets platform of its primary argument that federal commodities law pre-empts state sports-gambling statutes. The September 26, 2026 decision allows Ohio and Tennessee to enforce their state gambling laws against Kalshi and leaves the company with a 1-for-3 record across the federal circuit courts. For accounting firms, auditors, and CFOs whose clients hold or facilitate event-contract positions, the ruling creates immediate questions about licensing exposure, instrument classification, and the adequacy of existing crypto accounting software workflows.

What the Sixth Circuit Actually Decided

The case turned on a narrow but consequential question: do Kalshi's sports event contracts meet the CEA's definition of a "swap"? That definition, introduced by the Dodd-Frank Act, includes contracts tied to an event "associated with a potential financial, economic, or commercial consequence." Kalshi argued that because sports outcomes affect advertisers, sponsors, and local economies, those downstream effects supply the required financial consequence.

How the panel read the "financial consequence" test

The court rejected that reading. Writing for the panel, Judge Julia Smith Gibbons held that the phrase covers only events with an inherent financial consequence, the canonical examples being an interest-rate move or a corporate debt default. The ripple effects of a sports result on local businesses are, in the panel's words, "too attenuated, indirect, and speculative" to satisfy the statutory test.

The court was equally dismissive of Kalshi's "mention markets," which allow users to trade on whether a broadcaster says a particular word on air. The opinion noted there is "no conceivable reason why the market might need to know" the probability of such an event, pointing to those contracts as evidence that Kalshi's swap theory proves too much.

The preemption argument also failed

Even if the contracts had qualified as swaps, the panel said the CEA would not pre-empt Ohio's or Tennessee's gambling statutes. The court found that both states are regulating sports betting and only incidentally affecting a federally registered exchange. That secondary holding matters because it closes an alternative route Kalshi might have used even after losing on the swap definition.

The panel also highlighted a concession Kalshi itself had made in earlier litigation: that its sports event contracts have "no inherent economic significance." The court used that admission directly against the platform.

The Growing Circuit Split and What Comes Next

This ruling does not resolve the law. It deepens a genuine split among the federal circuits that is almost certain to reach the U.S. Supreme Court.

Where each circuit stands

The Sixth Circuit's decision follows a Third Circuit ruling in April 2026 that sided against Kalshi in a New Jersey case. The Ninth Circuit, however, ruled in Kalshi's favour in a Nevada case on August 28, 2026. That 1-for-3 scorecard, with the Fourth Circuit still to rule in a pending Maryland appeal, means the legal status of prediction market event contracts differs depending on which federal circuit a platform or its users sit in.

The CFTC, operating under Chair Michael Selig as the commission's sole member, filed an amicus brief in the Ohio appeal in May 2026 asserting exclusive federal authority over prediction markets. That position has not yet been tested at the Supreme Court level, but the widening circuit divergence makes a certiorari petition increasingly likely.

New Jersey's Attorney General has separately asked the Third Circuit to reconsider its April decision, and more than a dozen states have taken enforcement action or filed lawsuits against Kalshi over its sports contracts. New York has moved to block a separate prediction market operator, alleging it is running an illegal gambling operation.

Accounting and Classification Implications for Firms

The central compliance question for accounting firms and their clients is not "who wins in court" but "how do we classify and report these instruments right now, given the uncertainty?"

Instrument classification under current standards

If event contracts are not swaps, they lose the specific accounting treatment that applies to derivatives under ASC 815 (U.S. GAAP) or IFRS 9. Instead, they may need to be assessed as gambling instruments, contingent liabilities, or intangible-type assets depending on the holder's position. The Sixth Circuit's reasoning specifically undermines the "swap" label, which is the classification that most digital asset accounting software workflows would have applied to CFTC-regulated event contracts listed on a designated contract market.

Firms that have been treating client or proprietary positions in Kalshi sports contracts as regulated derivatives should revisit those classifications in light of this ruling. The position taken in a given client's financial statements needs to be defensible under the law of the circuit in which that client operates, not merely under the CFTC's claimed federal authority.

State licensing and AML exposure

Ohio and Tennessee can now enforce their gambling licensing regimes against Kalshi. For firms whose clients have accessed those contracts from within those states, there is a secondary question of whether the clients themselves face any regulatory exposure under state gambling law. That question is particularly acute for corporate treasuries or funds that traded event contracts as part of a broader digital asset strategy.

From an AML perspective, crypto bookkeeping software that tags event-contract flows as "regulated derivatives activity" on a CFTC-licensed exchange may be mislabelling those transactions in jurisdictions where state law treats them as unlicensed gambling. Firms should ensure their transaction-monitoring rules and suspicious activity report thresholds reflect the instrument's actual legal status in each applicable jurisdiction.

Disclosure and audit considerations

For auditors and CFOs preparing financial statements for entities with material event-contract exposure, the circuit split itself constitutes a contingent liability disclosure trigger under ASC 450. The outcome of the pending Fourth Circuit appeal and any Supreme Court petition should be tracked as subsequent events. Where positions are material, a note explaining the regulatory uncertainty, the circuit conflict, and management's classification rationale is appropriate under both U.S. GAAP and IFRS.

Firms using crypto accounting software to aggregate digital asset positions should confirm that those systems can flag event-contract instruments separately from traditional derivatives and that reports can be filtered by state or circuit jurisdiction for client-specific analysis. A single consolidated report that blends swap-classified and non-swap-classified event contracts will produce misleading figures until the law is settled.

Practical Steps for Accounting Firms and CFOs

The legal outcome of Kalshi's Supreme Court petition, if it proceeds, may be years away. Firms need to act on the current state of the law, not the hoped-for outcome.

Review and reclassify existing positions

Audit any client or proprietary position in prediction market event contracts that was classified as a CFTC-regulated swap. Determine the client's state of residence or business registration and assess whether the Sixth, Third, or Ninth Circuit's reasoning applies. Where the Sixth or Third Circuit controls, the swap classification is now legally precarious.

Update transaction monitoring rules

AML teams should reconfigure transaction-monitoring parameters so that flows to and from prediction market platforms in Ohio, Tennessee, New Jersey, and other states with active enforcement are not automatically treated as low-risk regulated derivatives activity. The legal status of these instruments is contested; monitoring rules should reflect that uncertainty.

Engage legal counsel on state licensing

Firms advising clients who are significant participants in prediction markets, whether as users, liquidity providers, or technology vendors, should obtain legal opinions on state gambling licensing obligations in each jurisdiction where those clients operate. The Sixth Circuit's ruling makes clear that federal registration on a CFTC-designated contract market does not automatically confer a licence to operate under state law.

Track the Fourth Circuit and Supreme Court developments

The pending Maryland appeal and any certiorari petition will be the next material developments. Set calendar alerts and ensure engagement letters with affected clients include a provision for follow-on advice once those decisions land. For firms tracking US regulatory developments as part of their US Senate crypto tax and broker reporting developments, the Kalshi litigation is part of the same broader question of federal versus state authority over digital financial instruments.

The CFTC's own position, articulated in its May 2026 amicus brief, is also worth monitoring. As our earlier coverage of CFTC tokenization readiness and its accounting implications noted, the agency under Chair Selig has been assertive about expanding federal jurisdiction over novel digital instruments. If the Supreme Court ultimately sides with the CFTC's swap interpretation, firms that have reclassified event contracts will need to reclassify again. Document the reasoning at each step.

What This Means for the Prediction Market Industry

Kalshi began listing sports event contracts in January 2025. Since then the company has faced enforcement actions, cease-and-desist orders, and lawsuits from more than a dozen states. The Sixth Circuit ruling is the most detailed judicial analysis of the swap definition to date and, because it addresses the preemption question as well, it is the most damaging single appellate loss Kalshi has suffered.

The split between circuits means that prediction market platforms face a genuinely fragmented regulatory map. A contract that is a federally protected swap in a Ninth Circuit state may be an unlicensed gambling product in a Sixth Circuit state. For institutional participants, that geographic patchwork is unworkable at scale, which is precisely why the industry expects a Supreme Court resolution.

Until that resolution arrives, firms and their advisers need to operate as if state law controls in the circuits that have ruled against Kalshi, while preserving the documentation needed to pivot quickly if the Supreme Court or Congress intervenes. Crypto accounting software that cannot capture jurisdiction-level classification flags will be inadequate for that task. Digital asset accounting software capable of applying different regulatory treatments to the same instrument type, depending on client location, is now a practical necessity rather than a premium feature.

Source: The Block

Frequently Asked Questions

What did the Sixth Circuit rule about Kalshi's sports event contracts?

The court unanimously held that Kalshi's sports event contracts do not meet the CEA's definition of a "swap" because the financial consequences of a sports result are too indirect and speculative to satisfy the statute. It also held that even if the contracts were swaps, federal law would not pre-empt Ohio's or Tennessee's gambling statutes.

How does this ruling affect the accounting treatment of event contract positions?

If event contracts are not swaps, they fall outside the scope of ASC 815 derivative accounting under U.S. GAAP. Firms that classified client or proprietary positions as regulated derivatives should revisit those classifications, particularly for clients in states within the Sixth or Third Circuit's jurisdiction.

Does the CFTC's claimed exclusive jurisdiction over prediction markets change anything?

Not yet at the appellate level. The Sixth Circuit was unpersuaded by the CFTC's amicus brief asserting exclusive federal authority. Until a Supreme Court ruling or Congressional action settles the question, firms must treat state law as controlling in circuits that have ruled against Kalshi.

Which states are currently enforcing against prediction market platforms?

More than a dozen states have taken enforcement action or filed suits against Kalshi. Ohio and Tennessee are the two states whose laws were at issue in the Sixth Circuit case. New York has separately moved against another prediction market operator. New Jersey's case produced the Third Circuit ruling also against Kalshi. A Maryland appeal is still pending before the Fourth Circuit.

What should firms do with their crypto accounting software to handle this uncertainty?

Firms should ensure their digital asset accounting software can flag event-contract instruments separately from confirmed swap-classified derivatives and can filter positions by client jurisdiction. Transaction-monitoring rules should reflect the contested legal status of these instruments in states where enforcement is active, rather than automatically treating them as low-risk regulated activity.