[dekoomer]

I have a Schiit Dac and i have two choices, use the USB input, or the SPDIF coax coming from my sound card i also get the choice to enable 7.1 Virtual surround sound, but will enabling any Virtual modification of sound degrade it?

 

[NA Blur]

If your setup is not 7.1 compatible placing your system in that mode is not going to help.  You will be lucky if it does not degrade the sound because 7.1 is a type of processing so when using stereo headphones there is no way that the single driver per earpiece is going to benefit from the 7.1 setting.
 
Since you have the option why not do your own testing and decide if it makes it sound better or not.  Most of us are not going to have your exact setup so posting your results could prove to be a benefit to the community.

 

[dekoomer]

 
When i Enable the Virtual surround sound, I notice that the sound go up by a few db. I fear that my sound card may be pre-amping the sound for my SPDIF coax out when i enable the 7.1 Virtual surround sound option. this may actually degrade the over all SQ by quite abit.
 
any amping that occurs before my Dedicated Schiit Lyr Amp is a Bad thing for Sound Quality. 
 
A up side to the Coax is that the sound is always 'on' so when i click on a folder in windows, i hear the Full Click noise, but with the USB a small mili-second or two of the sound is cut-off.