Bet on it: The Trumps’ ties to prediction markets will become the IRS’s problem

Two interesting phenomena are simultaneously unfolding. Despite billions of dollars being wagered in prediction markets, the IRS has remained uncharacteristically reticent on the associated tax implications of such transactions. At the same time, Donald Trump Jr. is being handsomely compensated as a strategic advisor for both Kalshi and Polymarket , the world’s two largest prediction market players, both of which he owns financial stakes in.

The question is, are the two related, or is this a mere coincidence? The dots appear inextricably connected.

First, consider some background. Traditionally, when the public faces a challenging tax issue requiring resolution, the IRS expeditiously issues rulings to provide necessary guidance. An emblematic example of this is when cryptocurrency was in its infancy, and taxpayers were unsure how to report its use. The IRS jumped into action and issued a clarifying notice that made its stance clear.

While the IRS’s actions are steeped in convention, prediction markets are still somewhat new, only coming into vogue in the last year or two. They enable participants to calibrate whether a particular outcome will transpire through event contracts priced from 1 cent to 99 cents. The lower the price, the lower the probability and the higher the possible return; the higher the price, the higher the probability and the lower the possible return.

The range of available event contracts is virtually limitless, spanning from predictions of who might be the next president to snowfall totals on a particular day this winter in Minneapolis. Prediction markets compete directly with traditional sports gambling and, going by their exponential growth, are winning.

Notwithstanding the popularity of prediction markets, the tax implications of reporting gains and losses associated with them remain uncertain. Indeed, due to their novelty, some conjecture that taxpayers must report gains as ordinary income. Others suggest that capital gain treatment is appropriate, and still others contend that a combination of the two makes sense. With respect to prediction market losses, some suggest they are subject to the same limitations as gambling losses, while others argue that no such limitations apply.

Keeping this in mind, what is likely going on behind the scenes?

Treasury Secretary Scott Bessent is currently the acting IRS commissioner . Frank Bisignano is the first-ever chief executive officer of the IRS . With these two men at the helm, both of whom happen to be close confidants of President Trump, would it be at all surprising if Trump Jr. (or his father, on his behalf) were to reach out to them and quietly pressure their agencies to remain on the sidelines?

Of course, either Trump could theoretically push the IRS for tax-favorable prediction market rulings. Yet given the vast overlap between gambling and participation in prediction markets, the issuance of such rulings could wreak havoc across the country. Seeking financial refuge in prediction markets, taxpayers would likely immediately abandon traditional gambling platforms wholesale, casinos would close and millions would be out of work.

Apparently, the preferred course of action is for the IRS to remain silent. This allows taxpayers to take aggressive reporting positions with potential impunity, costing the nation’s coffers billions of dollars in forfeited tax revenue, while Trump Jr. amasses significant personal wealth through his supposedly savvy advisory services.

In light of the apparent and actual conflicts of interest in this situation, two simple measures are in order.

First, the Treasury inspector general for tax administration should immediately launch an investigation to determine whether there has been any undue pressure on the IRS to kowtow to the Trump family’s wishes. Second, the IRS should promptly issue a ruling drawing the simple and sensible conclusion that, akin to gambling, prediction market gains are to be reported as ordinary income and that losses are subject to the same limitations as those arising from gambling.

Implementing these two measures would readily lift the veil of doubt looming over the Trumps’ possible machinations. Yet in this instance, the irony lies in the unsettling unpredictability of whether justice will be served.

Jay A. Soled is a Distinguished Professor of Taxation at Rutgers Business School.