How to Use Bitcoin Profits to Pay Off Your Student Loans

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In mid-December 2017, the price of a single bitcoin reached almost $20,000. Since then, bitcoin has shown a great deal of volatility. The price as of March 20, 2018, is around $9,000.

However, when you consider that a year ago bitcoin was going for less than $1,000, you can see why people are excited about the potential in this cryptocurrency, including the possibility of using it to pay off their student loan debt.

But how practical is it to use bitcoin to pay off your student loans? Here’s what you need to know.

You can’t directly pay off student loan debt with bitcoin

“As far as I know, there’s not a way to directly use bitcoin to pay off your student loans,” said Larry Ludwig, a cryptocurrency investor and the founder of financial education website Investor Junkie.

A few years ago, Alex Gorale published an account of his strategy to use bitcoin to pay off student loan debt. His strategy involved using the now-defunct website Brawker to exchange bitcoins for gift cards that could be used on, where he made student loan payments. While this specific approach can’t be used today, it’s possible to set up a similar arrangement.

If you can find someone willing to let you buy a gift card from them using bitcoins, you could then obtain items through a site such as EvoShare. This particular site puts 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.

Take bitcoin profits and pay off student loans

Instead of jumping through those hoops, however, Ludwig said it makes more sense to sell a portion of your bitcoin holdings at a profit. Then, use that money to tackle student loan debt.

“If you bought bitcoin a couple [of] years ago, you should have a pretty tidy profit, even if you didn’t sell when it was at an all-time high,” said Ludwig.

Back in December 2017, Reddit user nickelot wrote, “I bought back in 2013, and these returns are more than I could have hoped for back then. The prospect of freeing myself from educational debt was simply too great to pass up.”

If nickelot bought bitcoins in 2013 for around $100, selling in December 2017 would’ve resulted in a return of thousands of dollars.

bitcoin pricing

Image credit: Yahoo Finance

Tax implications of selling bitcoin

Before you liquidate some or all of your bitcoins and use the proceeds to erase your student loan debt, Ludwig pointed out that you need to understand the tax implications of selling the cryptocurrency.

“The IRS always wants its cut,” said Ludwig. “How your bitcoin profits are taxed depends on how you obtained them.”

According to the IRS, virtual currencies, such as bitcoin, are treated as either income or capital assets.

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 a bitcoin for $300 in 2014 and sold it in 2017 for $14,000, you would realize a gain of $13,700. 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 a bitcoin on Oct. 30, 2017. On that day, bitcoin was worth $7,389.55. You would have to add that amount to your income on your 2017 taxes.

“Depending on your situation, that could bump you into a higher tax bracket,” said Ludwig. “You could lose out on a tax refund or even owe money.”

Decide if paying off debt with bitcoin earnings is the right move

When deciding if selling bitcoin is the right move for you, Ludwig said it’s important to consider the current state of the cryptocurrency. “It’s still a speculative investment,” he pointed out. “We don’t know the future of bitcoin and whether … it will become a true asset class.”

If you aren’t sure that bitcoin will continue gaining, Ludwig said that selling can be a good idea. “Take profits while they’re available,” he said. “But talk to a tax professional to see how to minimize the impact.”

In some cases, you might be better off liquidating a little at a time and making your payments on a rolling basis.

On the other hand, if you think bitcoin will be a viable investment down the road, it might not make sense to lose all those gains to pay off student debt, which usually comes with relatively low interest rates.

“No matter what you decide, you need to carefully think through the situation,” said Ludwig. “There’s so much hype around bitcoin right now that it’s important to take measured action.”

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