A two‐way coupling algorithm for wave‐current interaction is developed and implemented into a nearshore circulation model to investigate the effects of fully wave‐current interaction on irregular wave transformation over an elliptic shoal. The wave field is simulated by a spectral wave model WABED, and the wave‐induced current is solved by a quasi‐three‐dimensional model WINCM. The surface roller effects are represented in the formulation of surface stress, and the roller characteristics are solved by a roller evolution model. The proposed two‐way coupling algorithm can describe both the generation of wave‐induced current and the current‐induced wave transformation, which is more physically reasonable than the one‐way approaches. The model test with a laboratory experiment shows that wave‐induced currents have an important influence on the wave transformation, for example, the wave energy defocusing due to the strong jet‐like current along the centerline of the shoal. It is revealed that the accuracy of simulated wave field can be significantly improved by taking into account the two‐way wave‐current interaction.