Since bitcoin was first introduced, this cryptocurrency has demonstrated a combination of potential and volatility. As of April 2021, bitcoin’s value came out to around $60,000, a sizable leap from its roughly $200 price in 2013. Considering its value, you can see why some people are excited about the potential of this cryptocurrency, including the possibility of using bitcoin to pay off their student loan debt.
But how practical is it to pay student loans with bitcoin? Here’s what you need to know:
- The bitcoin basics
- Why you can’t directly pay student loans with bitcoin
- How to put bitcoin profits toward student loans
- Tax implications of selling bitcoin
- Deciding if paying off debt with bitcoin earnings is the right move
Bitcoin is a form of cryptocurrency, or digital currency, and its value isn’t associated with a specific country. That means, if you live in the United States, you can sell something to someone living in China and exchange bitcoin without converting your money from the U.S. dollar (USD) to the people’s renminbi (RMB).
Bitcoin, like other types of investments, is viewed as property by the IRS, says Anjali Jariwala, a certified financial planner, certified public accountant (CPA) and founder of FIT Advisors, a company that offers financial planning, investment management and tax planning services to business owners and physicians.
Since bitcoin is a relatively new currency, there’s still not a lot of regulation of it yet. However, down the road, we might see more guidance on cryptocurrency as well as a change in how the IRS taxes it, Jariwala says.
“In general, I think bitcoin still offers good long-term risk/reward potential as part of a diversified asset mix, so whether someone should consider taking profits should depend on how large of a position it has become for them, and what their conviction is in the asset class,” says Lyn Alden, founder of Lyn Alden Investment Strategy.
Unfortunately, if you’re thinking about how you can pay student loans with bitcoin, there’s not really a direct way to do this, as opposed to using the USD or other common types of currency.
If you can find someone willing to let you buy a gift card from them using bitcoins, you could then obtain items through websites such as Bitrefill and Coincards. The site EvoShare allows you to put a percentage of your regular purchases toward your student loans. It’s a roundabout way of using bitcoin to get rid of student loan debt.
Back in 2013, the now-defunct website Brawker was started and allowed users to buy just about anything. In 2014, Alex Gorale published an account of how to use bitcoin to pay off student loan debt using Brawker to exchange bitcoins for gift cards that could be used on Tuition.io, where he made student loan payments. While this specific approach can’t be used today, you may be able to set up a similar arrangement.
Instead of going through the trouble of trying to figure out how to pay student loans with bitcoin, you also have the option to sell a portion of your bitcoin holdings at a profit and then use that money to tackle student loan debt.
“If you’re someone who got in early on bitcoin, it’s not a bad idea to capture that gain, and if you’re doing it to pay off debt, you’re helping your overall net worth,” Jariwala says.
However, this approach has its downsides as well. This is risky because the federal government views virtual currencies, including bitcoin, as either income or capital assets, which means you’ll owe the IRS a slice of the pie.
“I think it’s just like any other investment,” Jariwala says. “If you’re selling out of an investment, you’re going to pay taxes on those gains. Those proceeds are going to be cut a bit by the taxes that you owe.”
While Alden says she wouldn’t single bitcoin profits out over any other investment profits when it comes to trimming gains and paying off loans, if bitcoin or any other asset becomes an uncomfortably large percentage of a portfolio, taking some gains and letting the rest of the position ride can be warranted.
“Whether it’s better to reinvest those gains in other investments or pay off debt, depends on one’s individual situation and preferences,” Alden says.
Before you liquidate some or all of your bitcoins and use the proceeds to erase your student loan debt, it’s important that you understand the tax details when it comes to selling cryptocurrency. Just like with selling stocks, you may end up owing the IRS.
If you buy bitcoin on an exchange, keep track of the fair market value at the time of purchase. This is your basis. When you sell, you’ll need to report the gain based on when you bought the bitcoins. If you bought more than a year ago, you receive a favorable long-term tax rate on the gain. For bitcoins held less than a year, gains are typically taxed at a higher rate.
For example, if you bought bitcoin for $300 in 2014 and sold it in 2021 for $60,000, you would realize a gain of $59,700. The IRS would expect you to pay taxes on your capital gains, which represent the difference between the price of the bitcoin when you bought it and when you sold it.
But what if you earn bitcoins instead of buying them? In that case, you have to treat each bitcoin you earn as income, based on its fair market value on the day you receive it. Let’s say you got bitcoin on Sept. 14, 2021. On that day, bitcoin was worth about $45,000. You would have to add that amount to your income on your taxes.
If you have high enough gains, selling your bitcoin could bump you up into another tax bracket in the eyes of the IRS, and you could end up owing money to the federal government.
“Not only do you need to talk to a CPA [if you sell], you need to be good about tracking the data so you have good records you can provide,” says Jariwala, who also owns cryptocurrency. “Right now, many of these platforms where you can buy cryptocurrency are not that great at tracking investments. It’s good to keep that data for yourself, just in case the tax treatment of crypto changes at some point.”
If you’re struggling to look at your current student loan interest rates and assess whether it would be worth paying off your student loans using bitcoin, check your most recent student loan statement for the total cost of your loan. To help you make your decision, use this student loan interest calculator to find out how much interest you’re paying on your student loans.
When deciding if selling bitcoin is the right move for you, both Alden and Jariwala agree that it really comes down to your personal financial situation.
“Student loan interest rates are very low, and depending on political outcomes, there is a possibility of some of them being forgiven in the years ahead,” says Alden. “So, that can reduce the incentive to pay them down quickly.”
On the other hand, Alden says, student loans are one of the few types of debt that can’t be discharged in bankruptcy, so it may give people peace of mind when they pay them off.
“If it’s a fairly low student loan, it probably doesn’t make sense to do that, but I have clients that aren’t comfortable with that debt burden and want to pay that off as quickly as possible,” Jariwala says. “But just like any other investment, you really want to understand all the implications.”
If you aren’t comfortable navigating tax policies when it comes to selling your cryptocurrency at a profit, Jariwala suggests talking to a financial advisor or CPA, especially if you have large gains.
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