Using hydrodynamical cosmological simulations we investigate the effect of baryonic dissipation on halo shapes. We show that dissipational simulations produce significantly rounder halos than those formed in equivalent dissipationless simulations. Gas cooling causes an average increase in halo principal axis ratios of ~0.2−0.4 in the inner regions and a systematic shift that persists out to the virial radius, alleviating any tension between theory and observations. Although the magnitude of the effect may be overestimated due to overcooling, cluster formation simulations designed to reproduce the observed fraction of cold baryons still produce substantially rounder halos. Subhalos also exhibit a trend of increased axis ratios in dissipational simulations. Moreover, we demonstrate that subhalos are generally rounder than corresponding field halos even in dissipationless simulations. All of these results highlight the vital role of baryonic processes in comparing theory with observations and warn against over-interpreting discrepancies with collisionless simulations on small scales.