wBTC and other Wrapped assets

I’ve read that conversion from BTC --> wBTC and the like doesn’t trigger a capital gain and that tyhe previous cost basis can carry over, is that a reasonable expectation? Assuming the same applies for things like ETH -->wETH.

Perhaps slightly different, would using BTC to directly trade for wBTC on an exchange like Coinbase be any different?

This is a grey area without any clear guidance from the IRS so there are two interpretations:

  1. It’s a taxable crypto-to-crypto trade (conservative position)
  2. It’s a non-taxable swap (new coin takes on the cost basis and holding period of the original coin)

You should connect with your tax advisor on how to handle these.

Is there an existing work around for tracking for minting WBTC from BTC? Any idea on timeline for automatically tracking?

To match up the two sides of the transaction: edit the BTC send transaction to make it a trade for WBTC in the appropriate wallet. Then mark the separate (now duplicated) receive WBTC as ignored. This is similar to the ICO transfer matching steps.

Long term: tracking a resolution for this.

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Thank you, Chandan. Much appreciated.

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It’s similar to exchanging one stable coin for another in the eyes of the IRS. Even when both stable coins are $1 or 1 to 1. I would say you still have to track the cost basis like you do with stable coins. The difference with a coin that moves in value is that you are going to trigger a taxable event. For example, if you bought your BTC for 48,500.15 then converted it to wBTC for 48,500.15 you would have no taxable event as it’s the same price. However for example, if you bought BTC at 48,500.15 and converted it later to wBTC at 51,810.50 you would end up with a taxable event of 3,310.35 since the price of Bitcoin moved up. On the plus side, it may also trigger losses if the price of Bitcoin went down, which you could claim.

This is basically how I see it getting taxed and how the current tax code is written. I don’t see it being safe to do it the other way as I don’t think it follows the IRS tax codes. The only way that changes is if the IRS clarifies differently how DeFi tokens are taxed. Or creates a new law where swapping the wrapped tokens in the DeFi space doesn’t trigger a taxable event.

What I think you are confusing this with is in regards to Token Swaps. This would only happen in cases like where EOS ERC-20 token was swapped for mainnet coins and the ERC-20 token was deprecated. In this case, it would be treated like what happens when your stock goes through a merger or acquisition, in which you end up with new shares of something else. The IRS does not look at the event as a taxable transaction cost basis from old shares carry over to the new ones.