Preferred Stock Dividend Strategy: Tax-Free Return of Capital Starting in 2025

In 2025, Strategy—a leading Bitcoin treasury company—released a revolutionary dividend policy for its preferred shareholders. This decision changes the way stock dividends are treated from a U.S. federal tax perspective. Based on guidance in Form 8937, dividend distributions are now classified as tax-free return of capital (ROC), providing significant benefits for long-term investors.

What Is Stock Dividend and ROC Tax Treatment?

A stock dividend is a distribution of a company’s profits to shareholders in the form of cash or securities. Typically, dividends are taxed as ordinary income. However, the special ROC treatment allows a portion of the stock dividend to be exempt from income tax, as long as the amount does not exceed the shareholder’s basis. This scheme differs because ROC is considered a return of the original investment, not a company profit.

Strategy has identified that its preferred stock dividends meet the criteria for ROC treatment under federal income tax regulations. This decision is fully supported by official documentation—Form 8937—which details the mechanism and tax implications of each distribution. For shareholders, this means a significantly lower tax burden compared to conventional dividend treatment.

Policy Details: From Basis to Long-Term Projections

To date, Strategy has successfully raised a total of $7.4 billion through its permanent preferred stock offerings. Of this amount, the company has distributed $413 million in dividends to shareholders. The applied annual dividend rate stands at 9.6% after discounts, demonstrating the company’s commitment to providing a competitive return.

The established mechanism is: if the stock dividend paid exceeds the shareholder’s basis, the excess will be classified as long-term capital gain, not ordinary income. This creates substantial tax flexibility, especially for investors who have held shares from the beginning.

Strategy anticipates maintaining this ROC tax treatment for more than 10 years. This long-term stability makes Strategy’s preferred stock dividends an attractive investment instrument for those seeking tax efficiency along with steady cash flow.

Impact on the Bitcoin Investment Ecosystem

This tax-free stock dividend policy reflects innovation in the financial structure of Bitcoin companies. With optimized return of capital, Strategy not only enhances investment appeal but also signals long-term confidence in its business stability. For institutional and retail investors seeking diversification within their Bitcoin portfolios, this policy opens new opportunities to allocate capital more efficiently—while minimizing tax liabilities through a measured and transparent stock dividend structure.