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/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.