Is Bridging Crypto a Taxable Event? 4 Common Scenarios Explained
As the crypto ecosystem expands across multiple chains, bridging assets has become a common activity for users looking to take advantage of different networks, DeFi protocols, and opportunities. But what happens at tax time? Is bridging your crypto from Ethereum to Arbitrum, or from Solana to Avalanche, considered a taxable event?
The short answer: It depends on how the bridge works.
In this article, we break down four common bridging scenarios and explain whether they are likely to trigger a taxable event, based on how the IRS treats crypto.
⚖️ How Tax Authorities View Crypto Transactions
The IRS, along with many other global tax authorities, views cryptocurrencies as property, not currency. This means that when you transact in crypto, you may be triggering taxable events.
There are also still many grey areas in how the IRS taxes crypto transactions, and bridging is one of these areas.
Before diving into examples, it’s important to understand a general tax principle: A taxable event occurs when there’s a disposition of crypto, meaning you sell it, trade it, or otherwise dispose of it for something else. If you’re just moving assets between wallets you control, there’s typically no tax.
However, if a bridge is structured in a way that mimics a trade or swap, it may be considered a disposal, even if you think you are receiving the same asset on the destination chain.
✅ Scenario 1: Native Token Bridge (Wrapped Token Issued)
Is it taxable? Maybe, maybe not.
In this case, your ETH is locked in a smart contract, and you receive a wrapped version on the destination chain. Since you still own the underlying token and haven’t exchanged it for a different asset, wrapping tokens is usually considered a non-taxable transfer, similar to moving funds between wallets.
However, check how the bridge works. Some might destroy and reissue tokens rather than lock and wrap, which is more akin to disposal and is therefore taxable.
❌ Scenario 2: Burn and Mint Bridge (Token Destroyed and Recreated)
Is this taxable? Yes.
Burning a token and minting a new token on another blockchain is treated as a taxable event. The destruction of the original token is considered a sale, and any gain or loss realized from this transaction must be reported for tax purposes. If this method of bridging is used, it may have significant tax implications.
This situation underscores the need to understand the essence of the transaction when bridging tokens.
❌ Scenario 3: Cross-Chain Swaps
Is it Subject to Tax? Yes
Crypto swaps are taxable events in most countries around the world. When a user exchanges one crypto for another while bridging, this transaction is undoubtedly classified as a taxable event and is taxed just like a standard swap. The exchange is considered a disposal of the original asset, and any profits or losses made during the swap must be declared.
❌ Scenario 4: Bridge Fees Paid in Tokens
Taxable? Absolutely.
Fee payments made with tokens are always taxable, and fees paid for bridging are no exception. The payment of fees is treated like a sale of the tokens used, and any gain or loss must be reported. Users should keep meticulous records of such transactions to ensure compliance.
📌 Key Takeaways
It is essential for investors and traders to understand the tax implications of bridging crypto.
In some situations, bridging may not trigger a taxable event, while in others, it may create a substantial tax liability.
Each transaction should be assessed individually.
If there is any uncertainty, investors and traders should consult with a crypto-savvy tax professional.
🧾 How to Report It
If a bridge is deemed taxable, you’ll need to:
Determine the fair market value of the token you gave up at the time of bridging.
Subtract your cost basis (what you originally paid).
Report any gain or loss on your tax return as a capital gain.
Tools like Awaken Tax make it easy to track your bridging history, determine which events are taxable, calculate gains and fees, and generate tax reports. Just connect your wallets and let us do the heavy lifting!
