Tax
STRC Dividend Tax Treatment
5 min read
This is general education, not tax advice. Consult a tax professional for your specific situation.
The one-sentence version
When STRC pays you a dividend, you don't owe income tax on it. Instead, it lowers the price you "officially" paid for your shares. You only pay tax later, if and when you sell.
That's it. That's the core concept. The rest of this page explains how and why.
What is return of capital?
Most dividends are taxed as income the year you receive them. Your bank's savings interest, treasury bond payments, and most stock dividends all work this way. You get the money, you owe tax on it that year.
Return of capital (ROC) is different. The IRS treats ROC distributions as if the company is giving you back part of your original investment, not paying you income. Because it's "your own money back" in the eyes of the tax code, there's no income tax due when you receive it.
Strategy, the company behind STRC, has confirmed that 100% of STRC distributions paid during 2025 were classified as return of capital. Strategy has also stated they expect this ROC treatment to continue for the foreseeable future - specifically, ten years or more. This is because Strategy does not have accumulated earnings and profits (E&P) and does not expect to generate them.
Source: Strategy's official announcement on Feb 2, 2026 confirmed 100% ROC treatment for all 2025 preferred stock distributions. Forms 8937 for each distribution are available at strategy.com/investor-relations/dividend-return-of-capital.
How cost basis works
This is where it gets practical. Walk through this example step by step.
Example: 100 shares for 1 year
- 1.You buy 100 shares of STRC at $100 each. Your total investment is $10,000. Your cost basis is $10,000.
- 2.STRC pays $0.958 per share per month (at the current 11.5% rate). That's $95.80/month in dividends.
- 3.After 12 months, you've received $1149.60 in cash dividends. You owe $0 in income tax on this.
- 4.But your cost basis has dropped from $10,000 to $8850.40 ($10,000 minus $1149.60 in ROC).
- 5.Your cost basis per share is now $88.50 instead of $100.
Your brokerage account still shows 100 shares worth ~$10,000 (because STRC trades near $100). The cash is in your account. Nothing has changed practically. But the IRS now considers your "purchase price" to be $88.50 per share, not $100.
What happens when you sell
This is the tradeoff.
Scenario A: You sell after 1 year at $100/share
- Sale price:$10,000
- Adjusted cost basis:$8850.40
- Capital gain:$1149.60
If held over 1 year: taxed at long-term capital gains rate (0%, 15%, or 20% depending on income). If held under 1 year: taxed at your ordinary income rate.
Scenario B: You never sell
- You continue collecting ROC dividends indefinitely
- Your cost basis continues declining
- You pay no tax until you sell
- If you hold until death, your heirs receive a stepped-up basis (the cost basis resets to the market price at date of death), potentially eliminating the capital gains tax entirely
The stepped-up basis at death is one of the most powerful features of ROC for long-term holders. It means the deferred tax may never be paid at all. This is a significant advantage over ordinary income investments where tax is owed every year regardless.
What happens when cost basis hits zero?
If you hold long enough, your cost basis will eventually reach $0. At 11.5% annually, this happens after roughly 8-9 years.
Once your cost basis is zero, any additional ROC distributions are treated as capital gains in the year received. So the tax deferral has a limit. But you've had years of tax-free income before reaching that point.
Cost Basis Decline Over Time
| Year | Cumulative Dividends | Cost Basis (per share) |
|---|---|---|
| 0 | $0.00 | $100.00 |
| 1 | $11.50 | $88.50 |
| 2 | $23.00 | $77.00 |
| 3 | $34.50 | $65.50 |
| 5 | $57.50 | $42.50 |
| 7 | $80.50 | $19.50 |
| 9 | $103.50 | $0.00 |
This assumes a constant 11.5% rate for illustration. The actual rate changes monthly.
Visual representation of cost basis declining to zero over time at the current 11.5% rate.
What if I reinvest my dividends (DRIP)?
If you use dividend reinvestment to buy more STRC shares, each reinvestment creates a new tax lot with its own cost basis and holding period. For example, if you receive $95.80 in ROC dividends and your broker automatically buys another share at $99, that new share has a $99 cost basis and its own clock for long-term vs short-term capital gains treatment.
The ROC classification still applies to the dividend itself. You owe no tax when the dividend is received and reinvested. But you now have multiple tax lots with different basis amounts, which makes tracking more complex over time. Most brokers handle this automatically, but it is worth reviewing your lot-level basis annually to confirm accuracy.
How it shows up on your tax forms
Your broker reports STRC dividends on Form 1099-DIV. Specifically:
- Box 3 (Nondividend distributions): This is where ROC appears. This is NOT taxable income.
- It does not appear in Box 1a (ordinary dividends) or Box 1b (qualified dividends).
Most tax software (TurboTax, H&R Block, FreeTaxUSA) handles this automatically when you import your 1099. The software knows that Box 3 amounts reduce your cost basis rather than creating taxable income.
If your broker shows STRC dividends in Box 1a instead of Box 3, the 1099 may need a correction. This can happen early in the year before the broker receives final classification from Strategy. Corrected 1099s are typically issued by mid-March.
Tax treatment comparison
| Income Type | When You Pay |
|---|---|
| Savings Account Interest | Every year |
| Treasury Bond Interest | Every year |
| Qualified Stock Dividends | Every year |
| STRC Dividends (ROC) | When you sell (or never) |
At a 24% marginal tax rate, earning $10,000/year from a savings account means $2,400 goes to taxes. Earning $10,000/year from STRC means $0 goes to taxes that year. The tax is deferred, not eliminated - but deferral has real value, especially over long holding periods.
Savings Account
Tax owed every year
STRC (Return of Capital)
Tax deferred until sale
Common questions
"Is return of capital the same as tax-free?"
No. It's tax-deferred. You'll owe tax when you sell, based on your lower cost basis. But deferral is valuable: money that stays invested instead of going to taxes compounds over time. And if you hold until death, the stepped-up basis may eliminate the tax entirely.
"Can the ROC classification change?"
In theory, yes. If Strategy generated earnings and profits, distributions could be reclassified as ordinary dividends. However, Strategy has stated they do not expect to generate E&P for the foreseeable future (ten years or more) given their corporate structure and bitcoin accounting treatment.
"Do I need to track my cost basis manually?"
Your broker should track it automatically. But it's worth verifying, especially in the first year. Compare your broker's cost basis with your own calculation (original purchase price minus cumulative ROC received).
"What about state taxes?"
ROC treatment applies to federal taxes. State tax treatment varies. Most states follow the federal treatment, but check your state's specific rules or consult a tax advisor.
"What if I hold STRC in a Roth IRA or traditional IRA?"
In a Roth IRA, all distributions and eventual gains are tax-free, so the ROC classification doesn't matter practically - it's already tax-free. In a traditional IRA, distributions are taxed as ordinary income on withdrawal regardless of how they were classified inside the account. The ROC advantage is most significant in taxable brokerage accounts.
"Are STRC dividends qualified or ordinary?"
Neither. STRC dividends are classified as return of capital (ROC), which is a separate category. They are not qualified dividends and they are not ordinary income. ROC does not appear in Box 1a or Box 1b on your 1099-DIV. It appears in Box 3 (nondividend distributions). You owe no income tax on ROC in the year you receive it.
"Are STRC dividends tax free?"
Tax-deferred, not tax-free. You pay no tax when you receive the dividend. But each distribution lowers your cost basis. When you eventually sell your shares, your capital gain will be larger because of the lower basis, and you will owe capital gains tax at that point. If you hold until death, the stepped-up basis may eliminate the tax entirely. So in practice, many long-term holders may never pay tax on STRC dividends.
"What if I bought STRC at a price other than $100?"
Your cost basis starts at whatever you actually paid. If you bought at $97 during an ex-dividend dip, your starting cost basis is $97 per share, not $100. ROC distributions still reduce your basis the same way. The only difference is you reach a $0 cost basis slightly sooner. If you bought above $100, the opposite is true, and you have a small buffer before basis erosion becomes meaningful.
"Do wash sale rules apply to STRC?"
Yes. If you sell STRC at a loss and repurchase within 30 days (before or after the sale), the IRS disallows the loss under wash sale rules. The disallowed loss gets added to the cost basis of the replacement shares. This matters if you are considering selling during a dip and rebuying. Consult a tax advisor if you plan to harvest losses on STRC.
The bottom line
STRC's return of capital classification is a genuine tax advantage for investors in taxable accounts. You receive monthly income with no immediate tax bill, and if you hold long-term, you may pay a lower rate (long-term capital gains) than you would on equivalent ordinary income. The tradeoff is a declining cost basis and a larger eventual capital gain when you sell.
It's not a gimmick and it's not a loophole. It's a structural feature of how Strategy is organized. But "tax-deferred" is not "tax-free," and understanding that distinction is important before relying on it in your planning.
For an example of how tax treatment affects strategy decisions, see our analysis of the STRC/SATA rotation strategy.
Strategy's official ROC documentation and Form 8937 filings are available at strategy.com/investor-relations/dividend-return-of-capital.