Every preferred distribution is Return of Capital.
Not ordinary income. Not qualified dividends. MSTR has classified each year's preferred distributions as Return of Capital on the 1099-DIV — which means you don't pay income tax on them now. They reduce your cost basis instead, deferring tax until you sell. And if you never sell? Your heirs inherit at stepped-up basis and the deferred tax disappears.
ROC = selling the BTC
A distribution lands on your 1099-DIV in one of three buckets:
- Ordinary dividends (Box 1a) — taxed at your marginal rate, up to 37% federal + state + 3.8% NIIT.
- Qualified dividends (Box 1b) — taxed at LTCG rates (0/15/20%) + NIIT + state.
- Nondividend / Return of Capital (Box 3) — not taxed this year. Every dollar reduces your cost basis one-for-one. When you eventually sell, the lowered basis produces a bigger capital gain — usually at long-term rates if held more than a year.
A company can only declare a distribution as ROC when it exceeds current & accumulated earnings and profits. E&P is the tax-code proxy for retained economic income, and it is not the same as GAAP net income. MSTR's income statement looks huge because of fair-value BTC markups — but those unrealized gains generate no E&P. Without E&P, distributions have to come from somewhere else. They come from capital.
And what capital does MSTR have? BTC. Cash raised from common-equity ATMs bought BTC. Cash raised from preferred ATMs bought BTC. Every dollar MSTR sends back out to preferred holders is — economically, and now tax-legally — BTC being returned. The BTC-cost forecast on this site isn't a metaphor or an analogy. It's what the 1099-DIV is saying in cashflow terms.
Look at STRF's forecast: year-1 coupon consumes ~841 BTC. MSTR codes those payments as ROC. Same arithmetic, two languages — one a geometric series, the other a tax form.
After-tax, these are not the same instrument
Illustrative — California top bracket. Use the calculator below for your own jurisdiction.
What is a 10% ROC yield actually worth to you?
Step-up at death erases the deferred gain
Each year of ROC distributions reduces your cost basis one-for-one. Hold long enough and basis hits $0 — after that, further ROC reclassifies as long-term capital gain and becomes currently taxable. For most holders this is a slow bleed: at 10% on a $100 basis, it takes 10 years to reach zero, and every year of deferral still compounds tax-free in the meantime.
But the real lever is IRC §1014 step-up in basis at death. Your heirs inherit the shares at fair market value on the date of death, not your adjusted (reduced) basis. All the deferred capital gain built up from years of ROC distributions simply vanishes on the estate tax return. It is not carried over.
So for a buy-and-hold investor who doesn't need the principal — or a retiree whose plan is built around §1014 — the effective federal + state tax rate on those 10% distributions is literally zero. Not deferred. Eliminated.
(This is the same mechanism that makes long-dated direct BTC so powerful in taxable accounts: no income events + step-up at death = never owed. Preferreds give you the yield without breaking the pattern.)
Not tax advice. MSTR's ROC classification depends on its annual earnings & profits calculation; a future year's distributions could be partly ordinary or qualified if E&P changes. State and federal tax rules evolve. NIIT thresholds, step-up rules, and bracket cutoffs vary by filing status and year. The SALT cap, AMT, and state-specific surcharges are not modeled here. This page explains the mechanics — not your return. Talk to a CPA or estate attorney before acting.