What Is WETH?
WETH stands for Wrapped ETH. It's an ERC-20 token that represents ETH on the Ethereum blockchain. Because ETH itself isn't an ERC-20 token, many DeFi platforms require WETH for compatibility. Wrapping ETH converts your ETH into an ERC-20 token that can be used seamlessly across protocols. The wrap itself is a simple contract call: you deposit ETH and receive an equivalent amount of WETH.
How Wrapping ETH Works
When you wrap ETH, you send your ETH to a smart contract address designed for wrapping. The contract issues you an ERC-20 WETH token at a 1:1 ratio. This process is akin to exchanging one form of currency for another that’s compatible with specific systems. The key point is that this is a direct, trustless swap: no price change occurs, just a change in form.
[Diagram suggestion: ETH deposit → WETH issuance]
Later, you can unwrap WETH back into ETH by burning the WETH tokens in the contract, which releases your ETH. This process is reversible and maintains a 1:1 value ratio at all times.
Tax Treatment of Wrapping ETH
The IRS has not issued explicit guidance on wrapping ETH. This creates a gray area. Most tax experts agree that a 1:1 wrap of ETH into WETH does not trigger a taxable event, because you’re not disposing of your ETH — you’re simply changing its form.
**Most accepted position:**
- Wrapping ETH into WETH is a non-taxable event, similar to exchanging one form of money for another at the same value.
- The cost basis of your ETH carries over to your WETH. For example, if you bought ETH at $2,000, that basis remains when you wrap into WETH.
- When you unwrap, it’s treated as a sale of WETH for ETH, which could be a taxable event if the WETH has appreciated.
**Potential complications:**
- If you use WETH as collateral or participate in yield-generating activities, gains or losses may accrue.
- Protocol incompatibility or wrapping through third-party services might introduce additional considerations.
| Action | Tax Treatment | Notes |
|---------|----------------|--------|
| Wrap ETH into WETH | Usually non-taxable | 1:1 ratio, no disposal |
| Unwrap WETH into ETH | Generally taxable | Treated as a sale at current market value |
**Important:** Always consult your CPA. These interpretations are based on current understanding and may change as IRS guidance develops.
Common Wrapping Tax Mistakes
Mistake 1: Assuming wrapping ETH is taxable. Many users believe any transfer triggers a reportable gain. Usually, it doesn't if done at a 1:1 ratio.
Mistake 2: Forgetting to track cost basis. If you wrap ETH bought at $1,500 into WETH, that basis carries over. Not tracking it can cause reporting errors.
Mistake 3: Unwrapping without considering gains. When you unwrap WETH back into ETH, it’s treated as a sale. If the WETH has appreciated, you may owe capital gains tax.
To avoid these, treat wrapping as a non-taxable event, and record your basis carefully. When unwrapping, treat it as a sale at the current market price.
How Moonscape Handles WETH Wrapping
Moonscape automatically detects WETH wrapping and unwrapping transactions. It flags the initial wrap as a non-taxable event based on a 1:1 ratio. The platform preserves your original ETH basis and tracks subsequent unwrapping as a sale, calculating gains or losses precisely.
In complex scenarios, such as participating in yield farms or collateralized lending, Moonscape integrates all related transactions to give you a clear tax picture. Our system flags any protocol-specific quirks or non-standard wrapping processes so you’re always aware of potential taxable events.