Glossary · R
Return of capital distribution
A distribution that, for US tax purposes, is treated as a repayment of the holder's investment, not as dividend income, because the issuer has no current or accumulated earnings and profits. It reduces the holder's cost basis.
Revised 22 October 2026 · Suggest a correction
Under US federal tax rules, a corporate distribution counts as a "dividend" only to the extent the company has current or accumulated earnings and profits (a tax concept, not accounting profit). Any amount beyond that is a nondividend distribution, commonly called return of capital (ROC).
The IRS explains that a return of capital "reduces the adjusted cost basis of your stock", and that once basis reaches zero, "any further nondividend distribution is a taxable capital gain" (IRS Topic 404). Payers break distributions into categories on Form 1099-DIV.
How it applies to digital credit
Strategy's August 2026 investor briefings state that it "currently expects" declared preferred distributions to be treated as return of capital to the extent of a US holder's tax basis, subject to change and individual circumstances (FWP, 24 August 2026).
The classification is determined after each tax year ends, based on the issuer's earnings and profits for that year. A statement of expectation is not a final classification, and the treatment can differ between years.
UK and other non-US holders
US tax classification does not decide how a UK resident is taxed. UK tax treatment follows UK rules, and US withholding tax is a separate question. How a broker withholds on a distribution that the issuer expects to be return of capital depends on the broker's procedures. 21DC's UK guides cover these points and cite HMRC guidance. Nothing here is tax advice.
What to check in the filing
- The issuer's tax disclosure in the prospectus supplement ("Material U.S. Federal Income Tax Considerations")
- Year-end Form 1099-DIV or issuer Form 8937 statements
- Your own tax position with a qualified adviser