The Ultimate Guide to Wrapped Tokens: WBTC, WETH, and Tax Rules

1. What Are Wrapped Tokens?

TL;DR for UK Taxpayers: Wrapped tokens, such as WBTC or WETH, are tokenized versions of crypto assets designed to enable interoperability across blockchains. HMRC treats wrapping and unwrapping tokens as taxable events, akin to crypto-to-crypto swaps, which trigger capital gains tax (CGT).

Wrapped tokens are cryptocurrency tokens pegged to the value of another crypto asset, allowing for seamless interoperability between different blockchain networks. Blockchains typically operate in isolated ecosystems, meaning assets like Bitcoin (BTC) cannot be directly used on Ethereum, and Dogecoin (DOGE) cannot be traded on Solana. Wrapped tokens solve this issue by creating blockchain-compatible representations of these assets, enabling users to trade and utilize them within decentralized applications (dApps) and DeFi protocols outside of their native chains.

A wrapped token functions as a tokenized version of the original asset, maintaining a 1:1 value peg and allowing for redemption (unwrapping) back into the original asset when needed. The process typically involves a custodian, such as a merchant or a smart contract, which holds the original asset in reserve and issues the corresponding wrapped version on the target blockchain. This system is similar to American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) in traditional finance, where a financial institution holds foreign stocks and issues tradeable receipts for them on domestic stock exchanges.

Wrapped tokens have gained significant adoption, with some commanding multi-billion dollar market capitalizations. Below is a list of the most popular wrapped tokens along with their market caps (as of February 5, 2025):

The total market capitalization of top wrapped tokens exceeds $40.5 billion, making wrapped assets a crucial part of the crypto ecosystem. If combined into a single asset, wrapped tokens would rank as the 8th largest cryptocurrency globally, surpassing Dogecoin (DOGE) at the time of writing.

2. Wrapped Bitcoin (WBTC)

Bitcoin and Ethereum are separate blockchain networks with no built-in interoperability, meaning Bitcoin (BTC) cannot be used directly on Ethereum. Wrapped Bitcoin (WBTC) was created to solve this problem, allowing BTC holders to access the Ethereum ecosystem and participate in decentralized finance (DeFi) protocols. WBTC is an ERC-20 token backed 1:1 with Bitcoin, meaning each WBTC token is fully collateralized by an equivalent amount of BTC held in reserve. While Bitcoin itself is not a stable asset, the concept behind WBTC is similar to that of stablecoins, as it maintains a fixed value relative to its underlying asset. The reserve BTC is managed by BitGo Trust, ensuring transparency by making the total circulating supply of WBTC publicly verifiable on the blockchain.

WBTC functions by standardizing Bitcoin to the ERC-20 format, making it easier for developers to integrate BTC into Ethereum-based smart contracts. This means Bitcoin holders can participate in DeFi applications such as lending, staking, and yield farming without selling their BTC or converting it to ETH. WBTC is managed through a decentralized governance model involving several key participants:

• Custodian – An entity (e.g., BitGo) that holds the actual Bitcoin and mints or burns WBTC.
• Merchant – A trusted entity (e.g., Kyber, Republic Protocol) that performs KYC and AML procedures, distributes WBTC to users and facilitates token burning.
• User – The individual or institution holding and transacting with WBTC on the Ethereum blockchain.
• WBTC DAO – A decentralized governing body that manages protocol changes and approves new merchants and custodians.

The process of minting new WBTC involves a merchant sending Bitcoin to the custodian, who locks the BTC in reserve and issues an equivalent amount of WBTC on Ethereum. Conversely, burning WBTC occurs when a merchant requests to redeem WBTC for BTC, triggering a process where the custodian releases the original BTC and removes the equivalent WBTC from circulation. These minting and burning transactions are transparent and can be tracked on blockchain explorers, ensuring accountability and trust in the system.

With WBTC, Bitcoin holders gain access to Ethereum’s DeFi market, increasing Bitcoin’s utility beyond simple store-of-value functions. As of 2025, WBTC remains the most widely used wrapped asset, with billions of dollars in market capitalization and significant adoption in lending protocols, liquidity pools, and decentralized exchanges.

3. Wrapped Ether (WETH) and Other Variants

Surprisingly, Ether (ETH), the native token of Ethereum, is not ERC-20 compliant. This is because ETH was created before the ERC-20 token standard was introduced in 2015. Many Ethereum-based decentralized applications (dApps) and smart contracts are built to handle ERC-20 tokens, making it difficult for ETH to be directly integrated into DeFi protocols. This is where Wrapped Ether (WETH) comes into play—a tokenized version of ETH that adheres to the ERC-20 standard, allowing ETH to be used seamlessly across Ethereum’s DeFi ecosystem. WETH enables ETH holders to participate in liquidity pools, decentralized exchanges (DEXs), and lending platforms without conversion issues.

In addition to WETH, several other wrapped variations of Ethereum exist, each serving a specific function:

• Wrapped Staked Ether (wstETH) – Built on Lido’s liquid staking platform, wstETH represents a wrapped, non-rebasing version of stETH, which is obtained by staking ETH. Unlike stETH, which undergoes daily rebasing (automatic balance adjustments), wstETH maintains a stable balance, making it compatible with DeFi applications. It allows users to earn staking rewards while simultaneously using their assets in lending protocols, DEXs, and yield aggregators.

• Wrapped eETH (weETH) – weETH is the wrapped version of eETH, a rebasing liquid staking token on ether.fi. Unlike its rebasing counterpart, weETH does not adjust balances, making it more compatible with DeFi applications. This allows users to receive both native ETH staking rewards and EigenLayer rewards while participating in Ethereum-based DeFi and Layer 2 ecosystems.

While wrapped ETH variants like wstETH and weETH serve specific staking and DeFi needs, other wrapped tokens are emerging across different blockchain networks, aiming to improve token interoperability. As the crypto industry matures, we can expect new wrapping technologies and tokenized representations of assets to expand cross-chain liquidity and bridge the gap between previously isolated blockchain ecosystems.

4. Tax Treatment of Wrapped Tokens

From a tax regulatory perspective, wrapping and unwrapping tokens is considered a taxable event under HMRC guidelines. Since wrapping a token involves exchanging one asset (e.g., BTC) for another (e.g., WBTC), it is treated as a crypto-to-crypto swap, which triggers a capital gains tax (CGT) liability. This means that if the market value of the asset has increased since it was acquired, a taxable gain must be reported.

Example: A user purchases 1 BTC for £50,000. Later, they exchange it for 1 WBTC when the market value of BTC has risen to £60,000. Since HMRC treats this as a disposal of BTC, the capital gain is calculated as follows:

Additionally, if the user paid 0.1 ETH in blockchain transaction fees at the time of the swap, this cost can be deducted from the total gain. If 0.1 ETH was valued at £300 at the time of the transaction, the taxable gain would be adjusted:

This gain would need to be reported on the user’s self-assessment tax return and would be subject to capital gains tax (CGT) at the applicable rate (10% or 20% depending on total income and gains).

For assets like rebasing wrapped tokens (e.g., stETH, eETH), special tax considerations may apply. Since rebasing tokens automatically adjust balances, they could be classified differently under tax rules. This case is covered in a separate guide.

To simplify tax reporting and ensure compliance with HMRC regulations, using crypto tax software like DeCrypto.tax is recommended. It automates tax calculations, tracks wrapped asset movements, and ensures accurate reporting of gains and losses.