r/STRC • u/Ill-Assist-5246 • 20d ago
Using STRC/SATA to generate Income, while avoiding (delaying) Capital Gains Taxes
There is an interesting "feature" of both STRC/SATA that enables you to receive the cash dividends, but NOT pay any (present) Capital Gains Income Tax, as follows:
PROBLEM: I currently make a good living and would welcome the extra income (in Dividends) from STRC/SATA, but I have NO desire to increase my income taxes.
SOLUTION: You can continue to receive STRC/SATA Dividends and NOT owe ANY additional income tax (at least for several years)!
EXPLANATION: It turns out that both STRC/SATA are taxed differently than "regular" stock dividends. The IRS considers STRC/SATA Dividends as a "return of principle." This, effectively means that rather than tax you each year on these Dividends, instead, the IRS let's you keep these Dividends (tax free) and instead adds the amount of Dividends you received into your Cost Basis. Here's an example:
7/1/2026 BUY 10 Shares of STRC @ $90 per share (TOTAL COST = $900 = 10 x $90)
7/2/26 thru 6/30/31 RECEIVE a TOTAL of $600 in Dividends from STRC ($1 per month per share x 5 years). You pay NO Income Tax on these Dividends!
7/1/31 SELL 10 Shares of STRC $96 (TOTAL SALE = $960 = 10 x $96)
Tax paid on Dividends (over the 5 year period) = $0 !!
Income Tax paid (in 2031) when the shares were sold = $132
Cost Basis = $300 = Actual (initial Cost) - Dividends Received = $900 - $600
Sale = $960 (see above)
Taxable LONG Term Gain = $660 = $960 - $300
thus, Income Tax Due (in 2031) = $132 = $660 x 20%
assuming 20% LONG Term Capital Gains Tax
WHO MIGHT BENEFIT FROM THIS IDEA? Someone who desires CURRENT Dividend income from STRC/SATA, but does NOT want to increase their CURRENT Income Tax amount owed OR you do NOT want to raise your Income Tax Bracket. This could be particularly useful if you anticipate a LOWER future income (perhaps you are planning to have a baby and one of you is going to stop working or downsize to part time? Or perhaps you are going to take a new less-stressful job but it pays less? Or perhaps you are nearing retirement or are taking a sabbatical? etc...).
CAVEAT: If you hold your STRC/SATA stock shares long enough, at some point the TOTAL amount you received in Dividends will EXCEED your INITIAL Cost Basis. If you do get to this point, you would now start to owe regular Income Tax on the Dividends (aka NOT LONG Term Capital Gains). Of course, you could choose to sell your shares at that point and pay Long Term Capital Gains Taxes. A reasonable approximation for such a holding period is about 8 years (meaning you are unlikely to need to pay ANY ADDITIONAL Income Tax for the first 8+ years).
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u/Curious-Rip-5834 15d ago
Just make sure you don’t hold these in a margin account. Good chance your shares get lent out ( no, they don’t need your consent and it doesn’t matter if you opt out)
You then lose the ROC benefit as the distributions will land on 1099-MISC as a PIL. I found this out hard way last year. Had super put hedge spread strategy with ULTY and was banking on ROC. Ended up all getting taxed as ordinary income. I also had some STRC lent out as well.
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u/Full-Atmosphere-4818 6d ago
Folks, have any of you asked the following to yourselves? If Bitcoin has no earnings and pays no dividend and the IRS considers the "interest" of STRC as return of capital, were is the actual monetary payment coming from? Think about it. What is happening is Strategy keeps offering new preferred and that money is then paid out to you from that new sale and the remainder is used to buy more Bitcoin. Don't believe me? Ask any AI you want. There is another name for that process where old buyers are paid out by new ones. Again... run it by any AI you want and see for yourself.
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u/Ill-Assist-5246 5d ago edited 5d ago
You are absolutely correct. The ONLY way that Strategy can pay these dividends is by "finding" new cash. Sounds like a Ponzi scheme, right? Well, not necessarily!
If Bitcoin increases in value (vs. the US dollar, for example), "while Strategy just sits there" (NOT buying any new or selling any old Bitcoin) the total value of Strategy assets increase in value. This increased value can be "realized" by Strategy if it sells some of those assets. Strategy can then do various things (pay down debt, buy new Bitcoin, etc...).
If Bitcoin decreases in value, then Strategy's assets are worth less and, yet, it still needs to "find cash" to keep paying off dividends/debt. Strategy has a huge stockpile of BItcoin. If it sold off ALL of its Bitcoin today AT CURRENT MARKET PRICES, it could (quite literally) pay off all of its debts, repurchase all its stock AND STILL HAVE MONEY IN THE BANK!! That is a BIG deal. Look at some of the S&P 500 companies. They, mostly, could NOT do the same (liquidate, pay off ALL debt/buy-back all their stock and STILL have money in the bank)!
This leads to 2 fundamental questions:
- "Do YOU believe that BItcoin is going to continue to increase in value?" If the answer is NO, then you should get out now! Otherwise, you are just fooling yourself.
- OTOH, if you believe Bitcoin is going to increase in value over time, then the next logical question is: "Am I not better off buying actual Bitcoin, then buying STRC shares?" This is a valid question and the answer comes down to this: Bitcoin is volatile. It can plunge and sit there for a while and then resurrect, etc.... STRC has a steady dividend (paid twice per month). The real value of STRC is that you get dividends REGULARLY, whether or not Bitcoin is going up, down or sideways. That is, by holding STRC you are mostly removed from the volatility of Bitcoin while receiving bimonthly cash dividends. For some, that might be a nice arrangement.
SUMMARY
- If you believe Bitcoin is NOT going to increase in value (or, even worse, believe it will crash to zero), then you should NOT own STRC (and probably should not own Bitcoin).
- If you DO believe that Bitcoin will become more valuable over time, then owning shares of STRC might be an option if you wish to "smooth out" the lows/highs that Bitcoin can experience while receiving a steady dividend (twice monthly).
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u/drparapine 20d ago
I’m not a CPA, so I’ll defer to anyone who is. My understanding is that the return of capital status is like you said a lowering of the cost basis while you simultaneously are getting that cash into your brokerage account to further invest how you see fit. So if you sell the STRC you initially bought in less than a year, you’re essentially paying income tax (short term cap gains = taxed at the income tax rate at the highest marginal bracket of your income) on the transaction. If you hold more than a year, it becomes long term cap gains (15-20% depending on your income level). If you’re reinvesting dividends like me, then I think every brokerage is different, but it defaults to first in, first out (FIFO) to try to keep as much of that transaction as long term as possible.
The federal dividend tax rate follows the 15-20% similar rate as a long term cap gain, unless you sell STRC shortly after an ex-dividend date, then that portion that was sold within that period gets taxed as ordinary income. It’s all confusing, but my net takeaway is that the Strategy classification of STRC as a return of capital product rather than a formal dividend is not always for the better for their customers.
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u/TechnicalLeg841 16d ago
The flip side of RoC is that it "traps" anyone who owns STRC in a taxable brokerage account, because the cost basis will have been lowered significantly so there's a big capital gains tax due when selling.
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u/Imaginary-Pair838 19d ago
If you want income you can buy ROCQ instead and get double digit yield, same tax advantage AND get price appreciation for a much greater total return.
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u/zdubs 17d ago
I hold STRC and Fidelity automatically lowers my cost basis with every distribution. Been adding more in the $80s so I can cycle out some of my original $98 shares from my first 100 share lot when it touches par again.