diff --git a/e2e/tests/transfer/forwarding_test.go b/e2e/tests/transfer/forwarding_test.go
index 4e8f9ea124a..5656e670a43 100644
--- a/e2e/tests/transfer/forwarding_test.go
+++ b/e2e/tests/transfer/forwarding_test.go
@@ -16,6 +16,7 @@ import (
 	"github.com/cosmos/ibc-go/e2e/testvalues"
 	transfertypes "github.com/cosmos/ibc-go/v8/modules/apps/transfer/types"
 	clienttypes "github.com/cosmos/ibc-go/v8/modules/core/02-client/types"
+	channeltypes "github.com/cosmos/ibc-go/v8/modules/core/04-channel/types"
 )
 
 func TestTransferForwardingTestSuite(t *testing.T) {
@@ -220,3 +221,96 @@ func (s *TransferForwardingTestSuite) TestForwardingWithUnwindSucceeds() {
 		s.AssertPacketRelayed(ctx, chainB, channelBtoC.PortID, channelBtoC.ChannelID, 1)
 	})
 }
+
+func (s *TransferForwardingTestSuite) TestChannelUpgradeForwarding_Succeeds() {
+	ctx := context.TODO()
+	t := s.T()
+	testName := t.Name()
+	t.Parallel()
+
+	relayer := s.CreateDefaultPaths(testName)
+	chains := s.GetAllChains()
+
+	chainA, chainB, chainC := chains[0], chains[1], chains[2]
+
+	opts := s.TransferChannelOptions()
+	opts.Version = transfertypes.V1
+
+	channelAtoB, _ := s.CreatePath(ctx, relayer, chains[0], chains[1], ibc.DefaultClientOpts(), opts, testName)
+	s.Require().Equal(transfertypes.V1, channelAtoB.Version, "the channel version is not ics20-1")
+
+	channelBtoC, _ := s.CreatePath(ctx, relayer, chains[1], chains[2], ibc.DefaultClientOpts(), opts, testName)
+	s.Require().Equal(transfertypes.V1, channelBtoC.Version, "the channel version is not ics20-1")
+
+	chainAWallet := s.CreateUserOnChainA(ctx, testvalues.StartingTokenAmount)
+	chainAAddress := chainAWallet.FormattedAddress()
+	chainADenom := chainA.Config().Denom
+
+	chainBWallet := s.CreateUserOnChainB(ctx, testvalues.StartingTokenAmount)
+
+	chainCWallet := s.CreateUserOnChainC(ctx, testvalues.StartingTokenAmount)
+	chainCAddress := chainCWallet.FormattedAddress()
+
+	t.Run("start relayer", func(t *testing.T) {
+		s.StartRelayer(relayer, testName)
+	})
+	t.Run("execute gov proposal to initiate channel upgrade", func(t *testing.T) {
+		chA, err := query.Channel(ctx, chainA, channelAtoB.PortID, channelAtoB.ChannelID)
+		s.Require().NoError(err)
+
+		upgradeFields := channeltypes.NewUpgradeFields(chA.Ordering, chA.ConnectionHops, transfertypes.V2)
+		s.InitiateChannelUpgrade(ctx, chainA, chainAWallet, channelAtoB.PortID, channelAtoB.ChannelID, upgradeFields)
+
+		chB, err := query.Channel(ctx, chainB, channelBtoC.PortID, channelBtoC.ChannelID)
+		s.Require().NoError(err)
+
+		upgradeFields = channeltypes.NewUpgradeFields(chB.Ordering, chB.ConnectionHops, transfertypes.V2)
+		s.InitiateChannelUpgrade(ctx, chainB, chainBWallet, channelBtoC.PortID, channelBtoC.ChannelID, upgradeFields)
+	})
+
+	s.Require().NoError(test.WaitForBlocks(ctx, 10, chainA, chainB), "failed to wait for blocks")
+
+	t.Run("verify channel A upgraded and transfer version is ics20-2", func(t *testing.T) {
+		channel, err := query.Channel(ctx, chainA, channelAtoB.PortID, channelAtoB.ChannelID)
+		s.Require().NoError(err)
+		s.Require().Equal(transfertypes.V2, channel.Version, "the channel version is not ics20-2")
+	})
+
+	t.Run("verify channel B upgraded and transfer version is ics20-2", func(t *testing.T) {
+		channel, err := query.Channel(ctx, chainB, channelBtoC.PortID, channelBtoC.ChannelID)
+		s.Require().NoError(err)
+		s.Require().Equal(transfertypes.V2, channel.Version, "the channel version is not ics20-2")
+	})
+
+	t.Run("IBC transfer from A to C with forwarding through B", func(t *testing.T) {
+		inFiveMinutes := time.Now().Add(5 * time.Minute).UnixNano()
+		forwarding := transfertypes.NewForwarding(false, transfertypes.NewHop(channelBtoC.PortID, channelBtoC.ChannelID))
+
+		msgTransfer := testsuite.GetMsgTransfer(
+			channelAtoB.PortID,
+			channelAtoB.ChannelID,
+			transfertypes.V2,
+			testvalues.DefaultTransferCoins(chainADenom),
+			chainAAddress,
+			chainCAddress,
+			clienttypes.ZeroHeight(),
+			uint64(inFiveMinutes),
+			"",
+			forwarding)
+		resp := s.BroadcastMessages(ctx, chainA, chainAWallet, msgTransfer)
+		s.AssertTxSuccess(resp)
+	})
+
+	t.Run("packets are relayed from A to B to C", func(t *testing.T) {
+		chainCDenom := transfertypes.NewDenom(chainADenom,
+			transfertypes.NewHop(channelBtoC.Counterparty.PortID, channelBtoC.Counterparty.ChannelID),
+			transfertypes.NewHop(channelAtoB.Counterparty.PortID, channelAtoB.Counterparty.ChannelID),
+		)
+
+		actualBalance, err := query.Balance(ctx, chainC, chainCAddress, chainCDenom.IBCDenom())
+		s.Require().NoError(err)
+
+		expected := testvalues.IBCTransferAmount
+		s.Require().Equal(expected, actualBalance.Int64())
+	})
+}