Strategy's Preferred Stock Dividend Tax Strategy: How the ROC Treatment Works Starting 2025

Strategy, a Bitcoin treasury company, made headlines with a major policy shift regarding its dividend tax treatment on preferred stock. The company disclosed that beginning in 2025, dividends distributed on its preferred stock would be classified as tax-free return of capital (ROC) under U.S. federal income tax rules—a significant advantage for shareholders. This information was formalized through Form 8937, the IRS document used to report nonrecurring distributions. With roughly $7.4 billion in perpetual preferred stock raised and approximately $413 million in cumulative dividends paid out, Strategy has built a substantial financial framework supporting this new dividend tax approach.

Understanding the Dividend Tax Classification

The distinction between ROC and traditional dividend taxation is crucial for investors. Under the new policy, distributions to preferred shareholders are treated as a return of your initial capital investment—meaning they’re not immediately taxable. However, any dividend amount that exceeds your tax basis (your original investment amount) will be classified as capital gains, which carries different tax implications. This dual-structure dividend tax treatment is now in effect across Strategy’s preferred stock offerings, with a weighted annualized dividend rate of approximately 9.6%.

The Multi-Year Advantage: Why This Matters

Strategy anticipates maintaining this favorable dividend tax treatment for over the next decade, providing long-term visibility for shareholders on their tax obligations. The tax-free ROC status represents a meaningful advantage compared to traditional dividend distributions, which are typically subject to ordinary income tax rates. By structuring preferred stock dividends this way, the company has created a more tax-efficient investment vehicle for those seeking steady income from their Bitcoin treasury exposure.