The Tax Advantage
Most people hear "10% dividend" and think: great, I'll owe taxes on that every year. With Strategy's preferred stocks, that's not how it works. Once you understand the difference, the appeal goes up significantly.
Return of Capital — What It Actually Means
The dividends paid by Strategy's preferred stocks are classified as return of capital rather than ordinary income. This is an IRS distinction, and it changes everything.
In plain English: instead of the IRS treating your dividend as income you earned this year, they treat it as the company giving you back part of what you paid. Your cost basis — the price you paid for the shares — decreases by the dividend amount each year. You don't pay taxes on it until you sell.
You receive cash every quarter. But you don't owe taxes on that cash yet. The IRS just deducts it from your cost basis. Tax is deferred — potentially for decades — until the day you sell.
This is not a loophole. This is exactly how the tax code works for certain preferred securities. It's the same mechanism used by Master Limited Partnerships (MLPs), real estate investment trusts (REITs), and other income-focused products.
A Real Example: STRD Year-by-Year
Let's say you buy 1 share of STRD today at $67. It pays $10 per year ($2.50/quarter). Here's exactly how the tax math plays out:
| Year | Dividend Received | Cumulative Received | Cost Basis Remaining | Tax Owed This Year |
|---|---|---|---|---|
| 1 | $10.00 | $10.00 | $57.00 | $0 |
| 2 | $10.00 | $20.00 | $47.00 | $0 |
| 3 | $10.00 | $30.00 | $37.00 | $0 |
| 4 | $10.00 | $40.00 | $27.00 | $0 |
| 5 | $10.00 | $50.00 | $17.00 | $0 |
| 6 | $10.00 | $60.00 | $7.00 | $0 |
| 7 ⭐ | $10.00 | $70.00 | $0.00 | $0 (basis fully depleted) |
| 8+ | $10.00 | $80.00+ | $0.00 | ~$1.50 (15% on $10 qualified div) |
| 9+ | $10.00 | $90.00+ | $0.00 | ~$1.50/yr ongoing |
Years 1–7: $70 received. $0 in taxes paid. That's $70 of tax-deferred income in your pocket.
Year 8 and beyond: Your basis is $0. The $10 annual dividend is now taxed as a qualified dividend — at 15% for most people. So you're paying $1.50/year in taxes on a $10 income stream. Effective after-tax yield on your original $67 investment: approximately 12.8%.
The Inheritance Bonus
This is the part that really gets people. If you hold these shares until you pass them on to your heirs, they receive a stepped-up cost basis — meaning the IRS resets their cost basis to the market price on the date they inherit.
All those years of deferred gains? Gone. Tax-free forever.
You bought STRD at $67. Your cost basis is now $0 after 7 years of dividends. STRD is now trading at $120. If you sold, you'd owe capital gains on $120 (basis $0). But if you hold and leave it to your heirs, they inherit at a $120 basis. The entire $120 gain simply disappears for tax purposes. Then they start collecting dividends with a $120 cost basis — and another 12 years of tax-free income before they owe anything.
I'm not an estate attorney and this isn't legal advice — but for long-term investors thinking about generational wealth, this treatment is worth a serious conversation with your CPA.
What Happens If You Sell?
If you sell STRD in year 8 when it's trading at, say, $90 — your cost basis is $0, so you'd owe long-term capital gains on the full $90. At 15%, that's $13.50 in taxes.
The tax efficiency of this strategy is maximized by holding, not trading. The preferred stocks are designed to be held for the long term. If you think you might need this money in 2 years, STRC (the savings account preferred) is a better fit because its price stays anchored near $100 and the exit math is simpler.
Tax Loss Harvesting — The Year-End Move
If you're currently holding MSTY or MSTR and sitting on losses, there's an opportunity worth considering before year-end.
The strategy: sell your losing position, realize the tax loss (which offsets gains elsewhere in your portfolio), and immediately rotate into a comparable position to stay in the trade.
📤 Step 1: Sell the Loser
Sell MSTY (or MSTR) at a loss. Record the capital loss. This loss can offset gains elsewhere in your portfolio — or up to $3,000 of ordinary income per year, carrying forward indefinitely.
📥 Step 2: Buy Something Similar
Buy IMST (not MSTY) — or rotate into STRC, STRK, STRD, or STRF. You're staying exposed to the Strategy ecosystem while capturing the tax benefit.
⏰ Step 3: Wait 30 Days
The IRS wash sale rule says you can't buy back the same security within 30 days. IMST is a different fund, so it's safe. After 30 days, you can swap back if you want.
With how far MSTR-related products pulled back from 2024 highs, you could potentially harvest losses that offset gains for more than one tax year. Worth a conversation with your CPA before December 31.
Which Account Type to Use
✅ Taxable Brokerage — Best for Preferreds
The return-of-capital tax treatment is most powerful in a taxable account. In an IRA, the benefit is largely wasted — IRAs are already tax-advantaged, so deferring capital gains inside one doesn't add much.
📋 IRA — Better for MSTR Common
If you're a long-term MSTR growth investor, an IRA (especially Roth) makes sense to shelter capital gains on a volatile asset. But for the preferred stocks, a regular taxable account is typically more efficient.
When in doubt, talk to your CPA about what's right for your specific situation.