What Are Wrapped Tokens? WETH, WBTC, and stETH Explained
Understand wrapped tokens, why they exist, how they work, and the tax implications of wrapping and unwrapping crypto in the UK.
If you have used DeFi, you have almost certainly encountered wrapped tokens — WETH, WBTC, stETH, wstETH. Understanding what they are and how they work is essential for both using DeFi effectively and calculating your taxes correctly.
What is a wrapped token?
A wrapped token is a tokenised version of another cryptocurrency, designed to be compatible with a different blockchain or protocol standard. WETH (Wrapped Ether) is ETH wrapped into the ERC-20 token standard. WBTC (Wrapped Bitcoin) is Bitcoin represented as an ERC-20 token on Ethereum. These wrappers allow assets to be used in smart contracts and DeFi protocols that require standard token interfaces.
Why WETH exists
Ethereum's native currency (ETH) predates the ERC-20 standard and does not conform to it. Many DeFi protocols require ERC-20 tokens to function. WETH solves this by providing a 1:1 backed ERC-20 version of ETH. You can wrap and unwrap at any time with no slippage — 1 WETH is always exchangeable for 1 ETH.
Liquid staking tokens
stETH (Lido Staked ETH) and wstETH (Wrapped stETH) are different from simple wrapped tokens. When you stake ETH with Lido, you receive stETH, which represents your staked position and accrues staking rewards over time. wstETH is the non-rebasing version — instead of the balance increasing, the token appreciates in value. These are crucial for DeFi because they let you use your staked ETH as collateral in lending protocols.
WBTC and cross-chain representation
WBTC brings Bitcoin's liquidity to Ethereum's DeFi ecosystem. It is backed 1:1 by real Bitcoin held in custody. This lets Bitcoin holders participate in Ethereum DeFi without selling their BTC. However, it introduces custody risk — you are trusting the custodian to maintain the backing.
UK tax implications
HMRC has not provided explicit guidance on whether wrapping ETH to WETH constitutes a disposal. Some advisors argue it is not a disposal because the economic substance has not changed — you can unwrap at any time with no gain or loss. Others take a conservative view that any token swap is technically a disposal. For stETH and WBTC, the argument for a disposal is stronger because you are receiving a genuinely different token. Keep records of all wrapping and unwrapping events to be safe.
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