You are changing the digital file into an analog signal, either it can read the digital file, or it can't. There's not really an in-between to my knowledge. I'm no dev or know much about software bare in mind
Not necessarily. AAC, like MP3, is an example of a lossy format - upon encoding uncompressed audio (e.g. WAV) into an AAC file, data has been selectively thrown away (therefore quality has been permanently lost) in order to achieve a smaller file size.
This is in contrast to lossless encoding formats like FLAC which don't throw away data, but use clever algorithms to store it in a smaller filesize - just like when you put files in a ZIP archive, when you uncompress them nothing has been lost - lossless audio is the same.
The bluetooth audio standard includes a number of lossy audio codecs (e.g. MP3) which all bluetooth compliant devices support. So if for example your audio files are in MP3, then the MP3 stream is sent over bluetooth unaltered, and the receiving device decodes it into an uncompressed audio stream which sent to the DAC and converted into an analog signal, amplified and sent to the speakers/headphones. This is fantastic as we haven't done anything to further degrade the audio compared to a wired setup. The digital data made it to the DAC completely unaltered from what was stored in the MP3 file.
If your files are in AAC, then in order not to lose quality the receiver must support the optional AAC codec. If not, the AAC audio will be transcoded (decoded then re-rencoded) into a different lossy audio format which is supported by both bluetooth devices, before it is wirelessly transmitted. This additional lossy encoding step degrades the audio quality further.
To my knowledge, there is not enough bandwidth provided by the bluetooth audio standard to support unencoded CD quality audio reliably.
If this was not the case, the AAC audio could be decoded and completely un-encoded 1411kbps CD quality audio could be transmitted over bluetooth. Or if the source was unencoded or lossless audio, you could have a completely lossless bluetooth setup.
Lossless encoding can't be used for wireless transmission because it makes no guarantees about bitrate - complex audio patterns can cause the lossless algorithms not to work efficiently and the encoded audio may not be any smaller/lower bitrate than the unencoded audio. Therefore to support lossless would also imply the wireless link can also support completely unencoded audio, so why would your bluetooth devices bother encoding to lossless in the first place.
That said, most decent lossy codecs like MP3 and AAC are subjectively 'transparent' at rates above about 200kbps. I.e. even though the audio quality has been slightly degraded, the degradation is so slight it cannot be perceived by humans.
SBC is a simple codec so it is not as efficient as AAC and MP3 but is much easier for devices to encode on-the-fly. As a result, 300kbps SBC is going to degrade quality more than 300kbps MP3 or AAC. As to how much degradation you can tolerate depends on the quality of your audio devices and your hearing.
The bottom line is, if you must transcode, you might as well select the highest bitrate and best encoder that your devices support, to minimise the degradation in quality caused by transcoding. Afaik this is currently LDAC 990kbps. One downside however is that the higher bitrate you use for bluetooth transmission, the more likely you are to encounter interruptions due to wireless interference.
