For U.S. federal tax purposes, STRC payments are not automatically taxable dividends. Strategy reported that 100% of distributions paid during calendar year 2025 on its preferred equity instruments were treated as nontaxable return of capital (ROC) to the extent the recipient’s tax basis. ROC generally reduces your STRC basis instead of creating immediate dividend income; any amount received after basis reaches zero is generally capital gain. Your final broker Form 1099-DIV determines the entries on your return, while Strategy’s applicable-year Form 8937 supports the basis adjustment.
What STRC payments represent for tax purposes
STRC is a Strategy preferred equity security. The cash payment shown on a brokerage statement is not, by itself, enough to determine whether you have dividend income, a nondividend distribution, or capital gain. The tax character comes from the issuer’s classification, the broker’s final information return, your adjusted basis, and the account in which you hold the security.
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In its February 5, 2026 results release, Strategy stated: “For U.S. federal income tax purposes, 100% of distributions paid during calendar year 2025 on the Company’s preferred equity instruments were treated as a nontaxable return of capital (“ROC”) to the extent of a recipient shareholder’s tax basis in their applicable preferred equity instruments, as reported on Forms 8937.” The statement concerns 2025 distributions and is an issuer position, not a permanent IRS ruling. Strategy also said it expects ROC treatment for the foreseeable future but warned that its expectations may change.
The applicable Form 8937 is important because issuers use it to report organizational actions that affect a security’s tax basis, including nontaxable distributions. Strategy’s Return of Capital Information page lists STRC Forms 8937 covering October through December 2025 and January through August 2026. Keep the form for the relevant distribution period with your broker records.
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Return of capital versus dividend income
Return of capital in a taxable brokerage account
A nondividend distribution classified as ROC is generally tax-deferred until it exhausts your adjusted basis in the STRC shares. You do not normally report the amount as ordinary or qualified dividend income merely because cash was paid. Instead, reduce the basis of the shares by the ROC amount, subject to the basis limitation.
For example, assume a taxable account holds STRC shares with an adjusted basis of $1,000 and receives a $120 distribution reported as ROC. The basis becomes $880. No current federal dividend income is created by that $120 while basis remains positive. If a later $950 sale occurs, the taxable gain is calculated using the reduced $880 basis, producing a $70 gain before considering other transaction adjustments.
What happens when basis reaches zero
ROC can be nontaxable only to the extent of your remaining basis. If your adjusted basis is $80 and a later distribution is $100, the first $80 reduces basis to zero. The remaining $20 is generally capital gain in the year received. IRS Topic 404 describes this basis-exhaustion rule for nondividend distributions.
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Once basis has reached zero, additional ROC-designated payments are not a way to defer tax indefinitely. They generally create capital gain when received, and a later sale uses a zero basis for the shares unless another tax rule changes the calculation.
Why ROC can increase tax on a later sale
Basis reduction postpones recognition rather than eliminating it. Every dollar that reduces basis increases the gain, or decreases the loss, calculated when you sell. The timing can be valuable because tax is deferred, but you must preserve lot-level records so the eventual sale calculation is correct.
How to report STRC on your federal return
- Wait for the final broker forms. Obtain the final Form 1099-DIV and any supplemental statement for the tax year. Do not substitute a finance website’s yield, a preliminary issuer estimate, or an interim account display for the final form used on your return.
- Identify the box used by the broker. A payment reported in box 3 is a nondividend distribution. A payment in box 1a is an ordinary dividend, and box 1b identifies the portion the payer reports as qualified dividend income.
- For box 3, adjust each affected STRC lot. Reduce the adjusted basis of the applicable shares by the reported nondividend distribution. Use the issuer’s Form 8937 to support the classification and retain it with the broker statement. If the distribution exceeds your remaining basis, treat the excess as capital gain under the applicable federal rules.
- For box 1a, follow the form’s dividend instructions. Report the ordinary-dividend amount as directed by Form 1099-DIV and your tax software or preparer. Do not reclassify it as ROC solely because an issuer later discusses ROC or because the security is preferred stock.
- For box 1b, apply the qualified-dividend rules. Use the Form 1040 or Form 1040-SR Qualified Dividends and Capital Gain Tax Worksheet, or the applicable Schedule D worksheet, when required. Box 1b is the payer-identified qualified portion; it is not a conclusion that every holder automatically receives favorable tax treatment.
- Reconcile discrepancies before filing. Compare the 1099-DIV with the applicable Form 8937, your trade lots, and prior basis records. If a broker issued a preliminary form and later corrected it, use the corrected form. Ask the broker for correction when appropriate; obtain professional advice on documenting a material unresolved difference.
- Recalculate basis when you sell. Use the reduced adjusted basis for the Form 8949 and Schedule D sale calculation, including any capital gain already recognized because a distribution exceeded basis.
What each Form 1099-DIV box means
| Box | Meaning | Typical STRC action |
|---|---|---|
| 1a | Total ordinary dividends reported by the payer | Report as dividend income according to the final 1099-DIV and return instructions. |
| 1b | Portion of box 1a identified as qualified dividend income | Use the qualified-dividend and capital-gain worksheet when applicable; verify that your holding period and other statutory requirements are met. |
| 3 | Nondividend distributions | Reduce the adjusted basis of the STRC shares, generally without current income until basis is exhausted; recognize excess over basis as capital gain. |
The broker’s final Form 1099-DIV is the reporting document used for the return. Form 8937 is supporting evidence for the issuer’s basis classification and does not replace a corrected broker form.
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When could STRC be a qualified dividend?
Strategy’s SEC-filed STRC prospectus discusses distributions as taxable dividends to a U.S. holder to the extent of Strategy’s current or accumulated earnings and profits and discusses possible qualified-dividend treatment. That prospectus language does not make every STRC payment qualified, and a preferred-stock label alone is insufficient.
IRS instructions generally require the stock to be held for more than 60 days during the applicable 121-day period, along with other statutory requirements. For preferred-stock dividends attributable to periods totaling more than 366 days, the holding-period rule generally becomes more than 90 days. The relevant dates, ex-dividend period, hedging activity, and other circumstances can affect eligibility.
Therefore, do not call an STRC payment “qualified” solely because a website displays a yield, the security has a preferred designation, or box 1b appears on an early statement. Use the final 1099-DIV and verify your own holding-period facts.
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Taxable brokerage account versus IRA
| Issue | Taxable brokerage account | IRA or another tax-advantaged account |
|---|---|---|
| Current payment | Box 1a, box 1b, or box 3 can affect the annual return. Box 3 generally reduces share basis. | The custodian’s account rules generally govern current reporting; activity inside the account is usually not reported as a separate dividend on the owner’s annual return. |
| Basis tracking | Track each STRC lot and every ROC adjustment. The reduced basis controls a later sale. | Share-level ROC adjustments generally do not create the same annual brokerage basis entry for the individual return, but distribution and withdrawal rules still apply. |
| Later sale or withdrawal | Sale gain or loss uses the reduced adjusted basis; capital gain may be recognized when basis is exhausted or shares are sold. | Tax depends on the account type, withdrawal timing, age, and other account-specific rules rather than simply on the STRC 1099-DIV character. |
Do not assume that an IRA makes every withdrawal tax-free or that a taxable-account ROC classification transfers unchanged to an IRA tax calculation. Keep the custodian’s forms and consult an adviser familiar with the specific account.
Federal, state, and local differences
The 2025 statement from Strategy addresses U.S. federal income tax. States and local jurisdictions can define dividends, nondividend distributions, basis, and capital gains differently, and some states may not follow a federal classification automatically. Your residence, filing status, and the state where a return is required can change the result.
Use the federal 1099-DIV and basis records as inputs, then check the instructions for every state or local return you file. A federal ROC treatment is not a guarantee of identical state treatment.
Common reporting mistakes and fixes
- Calling every STRC payment a dividend: Check the final 1099-DIV box and the applicable Form 8937 before entering income.
- Ignoring basis after receiving ROC: Enter the reduction in your lot records immediately. Otherwise a later sale can show an overstated basis and understated gain.
- Using a preliminary form: Wait for a corrected 1099-DIV when the broker changes its classification.
- Reporting box 3 as box 1a: A nondividend distribution is generally a basis adjustment, not ordinary dividend income while basis remains.
- Assuming box 1b settles everything: The payer identifies the qualified portion, but your holding period and other statutory conditions still matter.
- Failing to identify the affected lot: ROC must be matched to the applicable preferred-equity position. Preserve purchase dates, quantities, reinvestments, transfers, and prior adjustments.
- Overlooking basis exhaustion: Once basis is zero, the excess distribution is generally capital gain rather than additional tax-free ROC.
Records to retain
For each tax year in which you hold STRC, retain the final Form 1099-DIV, the broker’s supplemental statement, the applicable Strategy Form 8937, trade confirmations, lot-level basis history, and any corrected forms. Keep notes showing how each box 3 amount changed basis and how any amount above basis was treated. These records are especially important if shares move between brokers or are sold several years after the distribution.
Can the tax character change in a future year?
Yes. Strategy’s 2025 statement is limited to distributions paid during calendar year 2025. The company said its expected ROC treatment may change, and the prospectus cautions that tax outcomes are not assured for every holder. A later year can contain a different mix of ordinary dividends, qualified dividends, nondividend distributions, or capital gain.
Recheck the Form 8937 for the applicable year and wait for the final broker Form 1099-DIV before filing. Do not carry a 2025 classification forward automatically to 2026 or any later year.
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Practical decision checklist
- Is the STRC held in a taxable brokerage account or a tax-advantaged account?
- Which box on the final 1099-DIV contains the payment: 1a, 1b, or 3?
- Does the applicable Strategy Form 8937 support a basis adjustment for that distribution period?
- What was the adjusted basis of the affected lot immediately before the payment?
- Did cumulative ROC reduce basis to zero, creating capital gain on an excess payment?
- If box 1b is present, did you satisfy the applicable holding-period and other qualified-dividend requirements?
- Do your state and local rules follow the federal treatment?
- Was a corrected broker form issued before you filed?
For 2025, the issuer’s reported federal position was 100% ROC to the extent of the holder’s basis. The filing result for any individual investor still depends on the final broker form, the investor’s basis and account type, the applicable year’s Form 8937, and state-specific rules.
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