Cross-chain compliance: Accounting for bridged assets in cryptocurrency
Aug 20, 2025・5 min read
“Interoperability” might sound like a technical crypto buzzword, but it’s simply about connecting different blockchains. Helping achieve this are “bridges” – protocols that link blockchains and make interchain transfers possible.
But bridges also bring unique classification confusions, especially when accounting for bridged assets. They can make filing crypto financial statements more challenging, but with the right approach, it’s doable.
In this guide, we’ll explain what interoperability means for blockchain, how bridges work, and how to make sure you report bridged digital assets accurately.
What is bridging in cryptocurrency?
Most cryptocurrencies currently operate on isolated networks with unique coding standards, making it difficult – or sometimes impossible – to move tokens across decentralized applications (dApps). Bridging protocols solve this by linking two cryptocurrency networks, allowing digital assets to move between blockchains without compromising security or decentralization, even if the blockchains have incompatible coding standards.
Different crypto bridges operate in various ways, but most require users to deposit their original assets in a virtual vault to receive a synthetic copy on the destination chain. If traders want to withdraw their original currency, they send the synthetic version back to the bridge to reclaim it. Typically, the bridge deletes (or "burns") all synthetic tokens it receives to ensure every cryptocurrency it issues has a 1:1 backing with the deposited assets.
Types of crypto bridges
Just like physical bridges have various designs – suspension, arch, or beam – but all serve the purpose of connecting point A with point B, crypto bridges have unique structures and features designed to link one blockchain to another. Their mechanisms may vary, but their shared goal is to create a path for digital assets to move between different networks with ease.
Here's a closer look at the different types of crypto bridges that currently exist:
- Centralized bridges: Like centralized crypto exchanges (CEXs), centralized bridges are managed by a single entity responsible for custodying crypto deposits. For example, BitGo operates a bridge between Bitcoin (BTC) and Ethereum (ETH) using its tokenized Wrapped Bitcoin (wBTC) product. In this system, BitGo holds the BTC deposited by users when issuing Ethereum-compatible wBTC.
- Decentralized bridges: Decentralized bridges use automated smart contracts to process transfer requests. Because of this, they offer greater transparency and eliminate the need for central custodians. While these non-custodial bridges reduce counterparty risks, they remain vulnerable to smart contract exploits and hacks. A notable example is the Cosmos Inter-Blockchain Communication Protocol (IBC), which uses a proof-of-stake (PoS) algorithm to transfer assets across sovereign chains in the Cosmos (ATOM) ecosystem.
- Bidirectional bridges: Bidirectional (or multidirectional) bridges allow traders to move assets back and forth between compatible blockchains, making them a more versatile option. Examples of bidirectional bridges include the Avalanche Bridge, Polygon Bridge, and the Base Bridge to ETH.
- Unidirectional bridges: These bridges allow one-way transfers between blockchains. While they were more common in earlier stages of blockchain development, unidirectional bridges are less prevalent today as bidirectional bridges offer a more seamless and flexible user experience.
What is a wrapped token?
When you bridge a cryptocurrency, you’re essentially transferring it from one blockchain to another by creating a new token that represents the original asset. Wrapped tokens work similarly – they represent the original cryptocurrency but in a format that’s compatible with a different blockchain. Think of a wrapped token as a “stand-in” for the original coin. These tokens hold the same value as the original because the bridge stores an equal amount of the underlying cryptocurrency to back them. This ensures wrapped tokens can move between blockchains while maintaining their worth.
For example, wBTC lets you use Bitcoin on Ethereum’s blockchain. It’s designed to match Ethereum’s coding standards (ERC-20), so it works with Ethereum-based apps.
Similarly, Wrapped Ethereum (wETH) is a version of Ethereum’s native Ether (ETH) that’s formatted to work with all Ethereum-based apps. While ETH itself is used for transactions, it’s not always compatible with certain dApps. Wrapping ETH into wETH solves this problem, making it easier to use for things like NFT trading and liquidity pools.
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How are bridged and wrapped tokens taxed?
Bridging and wrapping both create new tokens, but tax authorities don’t always treat them the same. When you bridge a token, the original asset is locked on one blockchain, and an equivalent token is created on another. Since the original token remains locked and its value doesn’t change, some tax authorities classify bridging as a transfer rather than a taxable event.
Wrapping, on the other hand, converts one cryptocurrency into a version that works on another blockchain (e.g., Bitcoin into Wrapped Bitcoin). Because wrapping involves exchanging one asset for another, tax authorities may view it as a taxable event.
Whether these activities are taxed depends on local laws and how authorities interpret them. You may be less likely to owe taxes on bridged or wrapped tokens unless you use them in DeFi activities like staking and yield farming or swapping them for other cryptocurrencies.
That said, crypto tax laws vary and are constantly evolving, which is why it’s best to stay informed about your local regulations or consult a crypto-savvy CPA who can help you accurately report bridged and wrapped tokens on your tax forms.
Accounting challenges for bridged assets
The biggest challenge with accounting for bridged tokens is that there’s no universal agreement on how to classify assets or interpret different events. But that’s not the only gray area. Here are a few other factors to keep in mind when accounting for bridged assets:
Derecognition and recognition status
When someone sends their crypto to a bridging protocol, do they still retain control over this deposit, or is it now in the possession of a smart contract’s designers? Also, are the tokenized cryptocurrencies distinct from the original cryptocurrency? These ambiguities over legal rights make it difficult for accountants to choose whether to derecognize crypto deposits and/or recognize bridged tokens as new assets. Generally, since entities retain beneficial interest in the original token through smart contracts, derecognition isn’t always applicable. However, accounting departments might require recognizing the wrapped token as a separate asset, depending on how people use it in web3.
Asset classification
Under US GAAP and IFRS accounting guidelines, bridged tokens are often viewed as “intangible assets” since they lack physical substance. However, classification can vary based on an entity’s business model and the nature of the asset, particularly if accountants use the IFRS model. For example, under IAS 2 of IFRS, if the entity holds bridged tokens for sale in the ordinary course of business (e.g., as a broker-dealer or exchange), they might fit the category of “inventory.”
Valuation
Even though bridged tokens mirror the market value of their original counterparts, there isn’t one easy way to value them in accounting. For bridged assets, valuation challenges might arise from limited liquidity, counterparty risk, or any price deviations between the original and wrapped tokens. However, if bridged assets meet the criteria of intangible assets, wrapped tokens are often measured at cost, less impairment. By contrast, if accountants use IFRS and classify bridged assets as inventory, they might value these assets at fair value.
Hacks and exploits
One of the great complexities of valuing bridged assets is their high susceptibility to hacks and exploits. Cybercriminals are known to target bridges because these protocols manage large amounts of cryptocurrency, sometimes worth hundreds of millions of dollars. If hackers compromise the bridge – such as by draining locked funds or minting counterfeit tokens – it disrupts the pegged relationship between the original and bridged assets. This situation compounds accounting issues by making it even harder to determine whether synthetic tokens have real value propping them up. Determining the rightful asset holders and restoring each user’s balance also involves a laborious legal process and potentially forensic analysis, adding more delays and unknowns to accounting cases.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.