WETH is wrapped ether: an ERC-20 token that represents ETH one for one. Converting ETH to WETH means sending ether to the WETH contract, which holds it and mints you the same amount of WETH. Sending WETH back burns it and releases the ether.
Ether is the native currency of Ethereum and predates the ERC-20 standard, so it does not implement the functions that standard defines. Most DeFi contracts are written to handle ERC-20 tokens, which leaves ETH as the one asset on the network that many protocols cannot accept directly.
WETH closes that gap. The contract is a deposit and withdrawal function with a token attached. It has no owner, no fee and no custodian holding your ether. The ETH sits in the contract until someone burns WETH to claim it, and the supply of WETH always matches the ETH held against it. That makes it the most widely used wrapped token in DeFi.
Most traders wrap without noticing. A swap router will wrap ETH, execute the trade in WETH and unwrap the result, all inside one transaction. Supplying ETH to a liquidity pool or a lending market usually involves a wrap somewhere in the call. An active wallet can show hundreds of these across a few years, none of them chosen deliberately.
There is no IRS guidance on this specific transaction, so it cannot be presented as settled either way.
The argument that it is not taxable rests on the economics. WETH is redeemable one for one at any time through a contract with no counterparty, so your holding after the wrap is the holding you had before it. On that view no disposal has occurred, and the basis and holding period of the ETH carry into the WETH.
The argument that it is taxable applies section 1001 literally. ETH and WETH are separate assets with separate contract addresses, and exchanging one property for another is a realisation event unless something exempts it.
Most practitioners take the first position for the contract wrap specifically, on the grounds that the asset never leaves your control. That is a reasoned position rather than a confirmed one, and it should be documented as such on the return.
Volume is the problem. Because routers wrap automatically, a wallet can generate hundreds of ETH to WETH conversions the owner never chose to make. Treated as disposals, they produce a long list of small gains and losses and a return that looks nothing like the trading behind it. Treated as non-events without a consistent rule applied to the unwrap as well, they leave WETH balances with no basis attached. Either way the cost basis has to follow the ether through the wrap and back out again.
Read our 2026 Guide to DeFi Taxes
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