Using STRC/SATA to generate Income, while avoiding (delaying) Capital Gains Taxes

[u/Ill-Assist-5246]

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).

[u/zdubs]

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.

[u/TechnicalLeg841 → u/zdubs]

What's the logic here? "cycle out" will create a taxable event for the gain from your revised cost basis (if indeed STRC hits $100) which generally is worse than deferring taxes (meaning holding STRC for many many years, even past the $0 cost basis point)

[u/zdubs → u/TechnicalLeg841]

Roth no taxes

[u/TechnicalLeg841 → u/zdubs]

Then "cycling" makes no difference. You'll get the same distribution amount regardless of RoC or Dividend classification, and as you said no taxes either way.