Wrapping ETH into WETH is a CGT event: the ATO's draft view in TD 2026/D2

You hold 5 ETH. A DeFi protocol you want to use only accepts ERC-20 tokens, so you wrap them into 5 WETH. Same value, same exposure, same wallet. Nothing was sold and no counterparty was involved.

On the ATO's draft view, you just triggered a capital gain.

TD 2026/D2 published 19 August 2026, sets out the Commissioner's preliminary position on the capital gains tax consequences of using a smart contract to wrap and unwrap crypto assets. It is short, it is clearly expressed, and it is proposed to apply to transactions already made.

The mechanism the determination describes

The draft applies only to lock and mint wrapping contracts, programmed in a specific sequence (paragraph 2). It uses ETH as "crypto asset A" and WETH as "crypto asset B", but the reasoning is not limited to those two.

Wrapping:

• You send an amount of ETH from your wallet to the wrapping contract.
• Your balance decreases, the contract's balance increases by the same number of units, and the contract locks them at its address.
• The contract mints an equivalent amount of WETH on a 1:1 basis and sends it to your wallet.
• You use the WETH in DeFi protocols or trade it.

Unwrapping:

• You call the withdraw function on the contract and specify an amount.
• The contract burns your WETH.
• The contract sends the corresponding amount of ETH back to your wallet.

Wrapping is CGT event C2

The ATO's reasoning rests on what property in a crypto asset actually is. Your holding is property because you can access, control and transfer it, and that control comes from your private key.

When you send ETH to a wrapping contract address, that connection is severed. Your private key no longer gives you the ability to transfer, use or otherwise deal with that particular asset. On the draft view, your ownership ends by abandonment, and CGT event C2 happens at the time the ETH is sent to the contract address (paragraph 9).

The draft is explicit that the contract's capacity to release an equivalent amount of ETH later does not preserve a continuing interest in the original. It means only that the WETH gives you the practical ability, under the contract's programming, to obtain a new holding of ETH by giving up the WETH.

The numbers follow from that:

• Capital proceeds are the market value of the WETH received, which corresponds to the market value of the ETH at the time it was sent (paragraph 11).
• The first element of the cost base of your WETH is the market value of the ETH at the time it was sent to the contract (paragraph 12).
• Your WETH holding is not the same CGT asset as the ETH you sent. They have equivalent value but are separate assets (paragraph 13).

Where a platform fee means the WETH received is worth less than the ETH sent, the market value substitution rule applies and the capital proceeds are the market value of the ETH at the time it was sent (paragraph 42).

The ATO's worked example

Finella buys 5 ETH on 5 March 2021 for $10,000. Four years later she wants to use a DeFi application that requires ERC-20 tokens, so she wraps her 5 ETH when they are worth $30,000 in total. The contract mints 5 WETH and sends them to her wallet.

CGT event C2 happens when she sends the ETH. Capital proceeds are $30,000. Her cost base was $10,000. Finella makes a capital gain of $20,000, in a year where she did not sell anything, did not receive any Australian dollars, and still holds the same economic exposure to ETH.

Unwrapping is a second CGT event C2

Going back the other way is another disposal, not a reversal of the first one.

When you unwrap, the WETH is burnt and ceases to exist both legally and algorithmically. Your ownership of it ends by abandonment, surrender or release. The CGT event happens when the WETH is burnt (paragraphs 17 and 18).

• Capital proceeds are the market value of the ETH you receive from the contract (paragraph 19).
• The first element of the cost base of your new ETH is the market value of the WETH at the time it was burnt (paragraph 19).

Continuing the example: a few months later Finella unwraps her 5 WETH and receives 5 ETH worth $28,000. The reduced cost base of her WETH was $30,000, so she makes a capital loss of $2,000, and the cost base of her new ETH is $28,000.

The draft also confirms that returning the WETH does not reduce the capital proceeds from the original wrap under section 116-50. Unwrapping is not a repayment or compensation, it is a separate reciprocal dealing (paragraph 44).

What the draft would mean for your holding period

The draft states plainly that the ETH you receive on unwrapping is a new CGT asset, distinct from the asset that was abandoned (paragraph 10). The property in the original holding, having come to an end on wrapping, cannot be revived by the later unwrapping (paragraph 34). It may have the same denomination and the same value, but it represents new holding rights.

Because the returned asset is newly acquired, its acquisition date for CGT purposes is when you receive it, not when you originally bought the ETH years earlier. For individuals, the 50% CGT discount depends on holding an asset for more than 12 months, so on the draft view a round trip through a wrapping contract would restart that clock on the new holding. If you are wrapping and unwrapping regularly, that is worth modelling before assuming a long term holding is still long term.

Not income, and no rollover

Two clarifications in the draft close off arguments in both directions.

Wrapping or unwrapping does not, of itself, produce ordinary income under section 6-5. The asset you receive is not derived from a counterparty and is not non cash consideration from a transaction with another person, because you are interacting with an autonomous smart contract rather than an entity. Section 118-20 therefore does not reduce the capital gain from CGT event C2 (paragraph 45).

There is also no rollover. The ATO does not accept that the replacement asset rollover in Subdivision 124-B is available. "Destroyed" in that provision sits among events concerning the involuntary loss of an asset, and voluntarily sending a token to a smart contract is not that. The provision also requires money or property received as compensation, which is language directed at a response to misfortune, not to a calculated decision to exchange one asset for another (paragraphs 59 to 61).

The scope limits are narrow and they matter.

The draft applies only to wrapping arrangements facilitated by smart contracts programmed as described. It expressly does not apply to any transactions where crypto assets are sent to custodian counterparties (paragraph 3). Many bridged and custodially backed wrapped assets work that way, and they are not covered.

It also does not consider the position of anyone carrying on a business where wrapping happens in the ordinary course of that business, or where the transactions are undertaken with a profit making purpose as part of an isolated commercial transaction (paragraph 5).

Liquidity pool tokens, staking derivatives and rebasing tokens are not addressed here either. If your activity sits outside the lock and mint pattern, this determination does not answer it.

It is proposed to apply retrospectively

This is the part to act on. When the final determination issues, it is proposed to apply both before and after its date of issue (paragraph 22). There is no prospective only carve out of the kind the companion airdrop ruling has for new token launches.

In practice, wraps and unwraps already sitting in your transaction history are in scope. Each one is a separate CGT event with its own proceeds and cost base.

The draft protection applies here too. If the determination applies to you and you rely on it reasonably and in good faith, you will not be charged interest or penalties on the matters it covers if it turns out to be incorrect. You will still owe the correct amount of tax.

What to do now

• Find every wrap and unwrap in your history. On the draft view each is a CGT event needing proceeds and a cost base, and because the date of effect is proposed to be retrospective, prior years are where the practical exposure sits.
• Record market value at the exact time of each event. For wrapping, that is when the asset is sent. For unwrapping, it is when the wrapped token is burnt. Where both happen in one contract execution, the value of the asset received is determined at that time (paragraph 18).
• Recheck your CGT discount assumptions. A round trip creates a new asset with a new acquisition date, which can pull a holding back under the 12 month threshold.
• Separate custodial wrapped assets from contract wrapped ones. Only the second kind is covered here.
• Do not assume it nets out. On the draft view unwrapping does not undo the gain on wrapping, so a gain in one year and a loss in the next would be two separate events in two separate returns.

How Summ handles wrapping

Summ identifies wrap and unwrap transactions as they import, with market value applied at the time of each event, so every wrapping event in your history is visible rather than buried.

Connect your wallets, review how your wrapping transactions have been categorised, and generate a report for the financial year you need. Our Australian Crypto Tax Guide covers the fundamentals, our guide to disposing of crypto explains how CGT events are calculated, and our companion piece covers the ATO's draft ruling on airdrops, published the same day.

This article is general information only. It summarises what the ATO's draft documents say and is not tax, financial or legal advice, does not take your circumstances into account, and should not be relied on to work out your own position. TD 2026/D2 is a draft and may change before it is finalised. Consider your own circumstances and consult a registered tax professional if you're unsure.