Key Takeaways
- Most tax professionals agree that wrapping/crypto should be treated as a crypto-to-crypto swap subject to capital gains tax.
- Some investors choose to take an aggressive approach and treat wrapping crypto as equivalent to holding the same cryptocurrency (non-taxable). Remember, this approach may not hold up against future scrutiny.
What is a wrapped token?
A wrapped token is a token that’s pegged to the value of an underlying cryptocurrency. Typically, it can be exchanged for the underlying cryptocurrency at any time.
Investors often use wrapped tokens if they’re interested in interacting with a blockchain that doesn’t support their existing coins.
For example, an investor may own Bitcoin but wish to interact with protocols on the Ethereum blockchain. In this case, they may exchange their Bitcoin for wrapped Bitcoin (wBTC). wBTC is designed to match the price of BTC 1:1 and can be swapped for BTC at any time.
What is token bridging?
Some investors who wish to interact with different blockchains choose to use multi-chain bridges instead of wrapped tokens. Multi-chain bridges are designed to help investors move their assets from one blockchain to another.
For example, an investor can use a platform like Portal to ‘bridge’ their ETH on Ethereum, and convert it to SOL on Solana.
I wrapped a token. How is this taxed?
At this time, the IRS has not put out guidance on how wrapping cryptocurrency is taxed. Some tax experts believe that wrapping a cryptocurrency may be treated as crypto-to-crypto trade (for example, the IRS may see the transaction as a taxpayer ‘swapping’ ETH for wETH).
Swapping one cryptocurrency for another is typically considered a taxable event. The holder incurs a capital gain or capital loss based on how the price of the cryptocurrency you’ve swapped away has changed since you originally received it.
Because there is no definitive guidance on how wrapping cryptocurrency is taxed, investors report them differently based on whether they wish to take an aggressive or conservative approach. We recommend taking the conservative approach, as it is more likely to hold up to future scrutiny.
Conservative approach: The conservative approach is to treat wrapping as a crypto-to-crypto swap, and report a capital gain or capital loss depending on how the price of your crypto has changed since you originally received them.
Aggressive approach: The aggressive approach is to treat wrapping a token as equivalent to holding the same asset. This would not trigger a taxable event.
If you are unsure how to report your wrapped cryptocurrency, we recommend reaching out to a tax professional.
If you choose to treat wrapping as a non-taxable event, you will not be able to claim a capital loss.
I wrapped a token. How is this taxed?
As discussed, swapping one cryptocurrency for another is typically considered a taxable event that requires the holder to incur a capital gain or capital loss on the coin that was disposed. However, the IRS has not released any guidance on whether wrapping and/or bridging tokens should be treated the same as a crypto-to-crypto swap.
As a result, investors report these transactions differently based on whether they wish to take an aggressive or conservative approach. We recommend taking the conservative approach, as it is more likely to hold up to future scrutiny.
Conservative approach: The conservative approach is to treat wrapping/bridging as a crypto-to-crypto swap, and report a capital gain or capital loss depending on how the price of your crypto has fluctuated since you originally received them.
Aggressive approach: The aggressive approach is to treat wrapping/bridging a token as equivalent to holding the same asset. This would not trigger a taxable event.
If you are unsure how to report your wrapped or bridged tokens, we recommend reaching out to a tax professional.
Can I claim a capital loss on a wrapped token?
Whether or not you can claim a capital loss on a wrapped token depends on which one of the approaches outlined above you choose to take. Remember, you should be consistent in how you treat similar transactions.
If you choose to treat wrapping your token as a crypto-to-crypto swap, you will be able to claim a capital loss, just as you would with any other crypto-to-crypto swap.
How is crypto bridging taxed?
Crypto bridges like Portal and deBridge allow you to make cross-chain transactions — such as swapping ETH on Ethereum for SOL on Solana.
It’s likely that these ‘bridging’ transactions will be treated as crypto-to-crypto trades subject to capital gains tax. You’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
How do I report fees for wrapping my token?
Typically, gas fees related to disposing of your cryptocurrency can reduce your tax bill.
Investors are allowed to add fees to their cost basis or reduce the amount of gross proceeds from a sale when fees are directly related to buying, selling, or trading properties. However, fees are typically not tax-deductible in other circumstances.
As a result, it’s reasonable to assume that individual investors can only add gas fees to their cost basis or subtract it from gross proceeds when reporting wrapping and/or bridging tokens as a crypto-to-crypto swap.
However, if you’re running a cryptocurrency-related business, you’ll be able to write off gas fees related to wrapping or bridging tokens as a business expense regardless of what approach you choose to take if they are a necessary cost of running your trade or business.
How do I report wrapping and bridging on my tax return?
If you’re treating wrapping and bridging as crypto-to-crypto trades, you should list each transaction on IRS Form 8949 with the following information:
- The type of cryptocurrency involved in transaction
- The units of crypto involved in the transaction
- The date you originally acquired your crypto
- The date you wrapped or bridged your crypto
- The cost basis (fair market value at acquisition)
- The fair market value at the time of the wrap/bridge
The totals from Form 8949 are then transferred to Schedule D, which summarizes your capital gains and losses.
Can the IRS track wrapping/bridging transactions?
The IRS can track wrapping, bridging, and other DeFi transactions. If you’ve transferred your crypto to/from an exchange with Know Your Customer (KYC) requirements, you likely can be identified.
In the past, the IRS has worked with contractors like Chainalysis to identify ‘anonymous’ wallets and crack down on tax fraud.
Looking to simplify your crypto tax reporting?
Looking for an easy way to report your DeFi transactions on your tax return? CoinLedger can help.
More than 700,000 investors use CoinLedger to file their crypto and DeFi taxes in minutes. The platform allows you to import your transactions from more than 1,000 blockchains and exchanges.
Frequently asked questions
- Is bridging crypto a taxable event?
- Is wrapping crypto a taxable event?
- Do you have to report taxes on crypto if you don’t sell?
- What is considered a taxable event in crypto?
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