If you’re holding MicroStrategy’s Series A Preferred Stock (STRC), you’ve probably noticed the distributions (Roughly 10-11% annualized). What you might not realize is how these payments are classified: Return of Capital (ROC). That classification changes how and when you pay tax on that money—in ways that matter whether you’re holding this in a taxable account or planning your exit strategy.
Let’s walk you through how this structure works and what it means for any distributions received from STRC.
What Is STRC?
STRC is a MicroStrategy Series A Perpetual Preferred Stock, distinguished from its fellow preferred offerings, STRK, STRF, and STRD. It’s also a separate class of shares from the common stock (MSTR) with distinct characteristics.
Key features:
Fixed dividend rate (currently around 10-11% annualized) with a monthly payout
No voting rights
No maturity date (perpetual)
Backed by MicroStrategy’s balance sheet and assets
Trades separately from common stock
The preferred shares rank senior to common stock in the capital structure, meaning STRC holders get paid before common shareholders in a liquidiation event. But they don’t participate in upside the way common shareholders do—the distributions are fixed and the product is designed to pin to $100/share.
For full details on STRC, see MicroStrategy’s initial press release announcing the product.
What Return of Capital Means
So far, every distribution to STRC holders has been classified as “Return of Capital.” This is not taxable income under current tax law. You’re essentially getting your own money back. The mechanic is that ROC reduces your cost basis in the shares.
Say you bought STRC for $1,000 and received $100 in ROC distributions. Your new cost basis is $900. You don’t owe income tax on that $100 today. But when you eventually sell those shares, your capital gain gets measured against that lower $900 basis instead of your original $1,000.
Strategy.com confirmed this treatment for 2025 distributions in their announcement: Strategy’s 2025 Distributions to Digital Credit Investors Are Return of Capital
Why This Structure Matters
If you’re holding STRC in a taxable account, the ROC classification creates specific tax implications. On the deferral side: you don’t recognize income now, so there’s no immediate tax bill on a dividend received from holding STRC. The tax only triggers when you sell. And if you hold long enough, you might qualify for long-term capital gains treatment at a lower rate than ordinary income.
But there’s a tradeoff that’s easy to miss.
Your cost basis keeps dropping with each distribution. Once it hits zero, any future ROC gets treated as capital gains in the year received—even if you haven’t sold the shares. At that point, the deferral stops working.
Whether this structure benefits you depends on your time horizon, tax situation, and when you plan to exit.
What You Need to Track
Keep your own basis records. Your broker might track this, but don’t count on them getting it right. You’ll need accurate records of every ROC distribution to calculate your capital gains correctly when you sell.
Understand holding periods. Long-term capital gains require holding the shares for more than a year. Sell early and you trigger short-term gains, which get taxed at ordinary income rates. That erases much of the ROC benefit.
Watch for reclassification. ROC classification depends on the company’s financials and how they report distributions. If MicroStrategy starts generating actual earnings that support dividend payments, future distributions could get reclassified as ordinary income. It’s not likely in the near term given their strategy, but it’s possible.
Who’s Holding STRC
STRC is attracting some Bitcoin-aligned investors who want yield alongside their Bitcoin exposure. It’s also drawing income-focused investors who are interested in MicroStrategy’s strategy (no pun intended) but prefer less volatility than common shares offer.
The tax deferral aspect matters more to some investors than others. High earners in high-tax states get more value from deferring income recognition. Investors planning to hold long-term can potentially benefit from lower long-term capital gains rates.
But the structure isn’t inherently better or worse than ordinary dividends—it’s just different, with its own set of tradeoffs.
The Risks
There’s no such thing as a free lunch. Holding STRC and deferring taxable income sounds great to certain investors, but it’s always important to consider the risks of any product you own. Some of the risks to STRC include:
Tax treatment could change. ROC today doesn’t guarantee ROC tomorrow, though actual recharacterization is rare.
Basis depletion has real ramifications. Hold long enough and your basis will reach zero. At that point, future distributions become immediately taxable. This also applies to selling at any point even before your basis hits zero—because it is reduced, a tax bill is incurred at the time of the sale.
No FDIC insurance. STRC is marketed as an alternative to cash, but yet doesn’t have the same FDIC insurance protection that your cash in the bank has. If for some reason, STRC fails as a product and goes to zero, it is not FDIC insured.
Company risk remains. This is still MicroStrategy. not holding Bitcoin itself. Your investment is ultimately tied to their Bitcoin accumulation strategy, balance sheet management, and trust in the company. If you’re bearish on any of those factors, STRC doesn’t change that.
What to Do With This
The ROC treatment of STRC dividends creates a specific tax structure that works differently than ordinary income. Whether that structure benefits you depends on your holding period, tax bracket, and investment goals.
The mechanics are straightforward: distributions reduce your cost basis, tax gets deferred until you sell (or until basis hits zero), and you’re responsible for tracking everything accurately.
Just remember: the IRS expects you to track your cost basis and report it correctly when you sell as this will create a taxable event due to a lower cost basis. A best practice is to realize that’s on you, not on your broker and confirm your records.
Disclaimer: This content is for educational purposes only and does not constitute tax, legal, or investment advice. Consult with qualified professionals regarding your specific situation.