The rapid rise of prediction markets has left a regulatory and tax vacuum, and the IRS's unusual silence is drawing sharp scrutiny—especially given the financial entanglements of the Trump family. Donald Trump Jr. serves as a paid strategic adviser to both Kalshi and Polymarket, the two largest platforms in the sector, and holds equity stakes in each. The question now is whether that relationship is influencing the IRS's failure to issue guidance.
An Unprecedented Regulatory Gap
Prediction markets allow users to buy and sell event contracts, with prices reflecting the probability of a given outcome—from election results to snowfall totals. The industry has exploded in popularity, rivaling traditional sportsbooks and generating billions in trading volume. Yet the tax treatment of these wagers remains unresolved, with no official IRS ruling on whether gains are ordinary income, capital gains, or something else—and whether losses are subject to gambling loss limits.
Historically, the IRS has been quick to clarify tax questions for new financial instruments. When cryptocurrency first emerged, the agency issued a notice within years, establishing that digital assets would be treated as property for tax purposes. But for prediction markets, which have been active for over a year, the IRS has offered no comparable guidance.
Conflicts of Interest at the Highest Levels
The silence is particularly glaring given the current leadership. Treasury Secretary Scott Bessent is acting IRS commissioner, and Frank Bisignano serves as the agency's first-ever CEO. Both are close allies of President Trump. The overlap with Trump Jr.'s business interests raises the possibility of undue influence, whether direct or indirect.
If the IRS were to classify prediction market gains as ordinary income and losses as gambling losses, it would likely curb the industry's appeal, pushing some users back to traditional casinos and sportsbooks. That could protect existing gambling revenues but would also limit Trump Jr.'s potential windfall. Conversely, favorable tax treatment could supercharge the platforms, but would cost the Treasury billions in lost revenue.
Call for Investigation and Clarity
Critics argue that the IRS's inaction is not benign neglect. They point to the potential for the Trump family to pressure Bessent and Bisignano to keep the agency on the sidelines, allowing aggressive taxpayer positions to go unchecked. The result, they say, is a de facto subsidy for prediction market participants—and a personal financial benefit for Trump Jr.
To address these concerns, two steps are urgently needed. First, the Treasury Inspector General for Tax Administration should open an investigation into whether any improper pressure has been exerted on the IRS. Second, the IRS should issue a ruling that aligns prediction market gains with gambling income, subjecting them to ordinary income rates and standard loss limitations.
Until then, the cloud of suspicion will linger. As the legal battles over state authority continue—see the recent Supreme Court fight—the tax question remains a ticking time bomb. And with the Trump family's financial stake in the industry, the stakes could not be higher.
