Crypto Tax Issues Regarding Paying Off Student Loans

If I ruled the world (Imagine that)

I'd free all my sons, I love 'em, love 'em, baby

Black diamonds and pearls

(Could it be, if you could be mine, we'd both shine?)

If I ruled the world

(Still living for today, in these last days and times)

-If I ruled the World, Nas and Lauryn Hill

The student loan interest deduction is a federal income tax deduction that allows you to subtract up to $2,500 in the interest you paid on qualified student loans from your taxable income. To be eligible, your income must be under certain limits. You don’t have to itemize deductions when you file your income taxes in order to claim this deduction. Like other types of deductions, the student loan interest deduction reduces your taxable income. So, for example, if you are in the 22% tax bracket and claim a $2,500 deduction, your deduction would reduce the taxes you owe — or increase the tax refund you receive — by $550. There are some people using the profit earned from cryptocurrencies to pay off student loan debt. In this article, we will discuss the tax implications of using cryptocurrencies to pay off your student loan debt.

It is important to first realize that you can’t directly pay off student loan debt with a cryptocurrency. Therefore, I will discuss the tax implications of converting your cryptocurrencies into cash to pay off the student loan debt. Before you liquidate some or all of your cryptocurrencies and use the proceeds to erase your student loan debt, you need to understand the tax implications of selling the cryptocurrency. If you pay off the debt then you may be able to qualify for the student loan interest deduction. However, the major issue would be “did the sale of the cryptocurrency increase your modified adjusted gross income (MAGI)?” MAGI are calculations that help the IRS to determine whether taxpayers may take advantage of certain credits and deductions.

The student loan interest deduction can be reduced, or eliminated entirely, depending on the taxpayer’s income. If you file as single you are entitled to a full deduction if your MAGI is $65,000 or less and a partial deduction if your MAGI is over $65,000 but less than $80,000. Above $80,000 you can’t claim a deduction. For married taxpayers filing jointly, the limits are $135,000 for a full deduction and between $135,000 and $165,000 for a partial one. Above $165,000 they are ineligible. For example, you would not qualify for the deduction, if you are single, made only $30,000 in taxable wages but the sold bitcoin that resulted in a $55,000 capital gain. In the example given, your MAGI is over $80,000, therefore, you can’t claim the student loan deduction even if you paid off more than $2,500 in student loan interest.

The second issue to consider is to make sure that you save enough taxes to cover the sale of the cryptocurrencies. Remember that the IRS considers cryptocurrencies as property. If you sell cryptocurrencies to pay off debt, you may have a capital gain. When you sell cryptocurrencies to pay off debt, always set aside money to pay off possible taxes. Sit down with your accountant to estimate how much to set aside for tax purposes. Have information like the purchase date and cost basis readily available

There may be a situation that you will have a capital loss if you sold your cryptocurrencies. Let’s say that you brought bitcoin at its peak back in 2017. You purchased $50,000 worth of bitcoin back in 2017 but you sold one bitcoin for $19,000 in 2022. You have a capital loss of $31,000. Keep in mind that you are capped at deducting only $3,000 of capital loss each year. However, you can roll over the losses to future tax returns. Also, depending on your other income, you may qualify for the deduction.

Do your research before using cryptocurrencies to pay off your debt. The IRS will always want their piece of the pie. Paying off student loans with earning made from cryptocurrencies may sound like a “no-brainer” but you must consider the tax implications. Don’t think that your amount of sold cryptocurrencies are too small for the IRS to notice. The IRS is developing a system to improve their enforcement of cryptocurrencies. You don’t want to get into a situation that paying off one debt results in owing more debt to the IRS. Take your time with the decision and have a conversation with your tax accountant.

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at!




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