YieldMax™ MSTY vs. Defiance MST: Tax Efficiency, ROC & 5‑Year Outlook

 Introduction

The recent explosion of option‑overlay ETFs has spotlighted two novel players tied to MicroStrategy (MSTR) exposure:

• MSTY (YieldMax™ MSTR Option Income Strategy ETF), launched February 21, 2024
• MST (Defiance Leveraged Long + Income MSTR ETF), launched May 1, 2025

Both seek to harvest option premium against MSTR’s famed bitcoin‑linked volatility, but their structures, tax treatments, and return‑of‑capital profiles differ — shaping very different long‑term outlooks.

Fund Profiles & Key Metrics

• MSTY writes call options on MSTR stock, generating monthly distributions almost entirely as return of capital (ROC).
• MST leverages swap contracts and options to target 1.5–2× daily MSTR performance, paying weekly distributions but lacking a published SEC yield as of its inception date.

Tax Efficiency & Return of Capital

• Return of Capital (ROC): Both funds will likely classify the bulk of their option premiums as ROC, which:

1. Defers tax by reducing your cost basis rather than triggering ordinary income.
2. Erodes NAV and available capital for compounding.

• Tax Treatment Differences:
• MSTY: Option income falls under mixed‑straddle rules — virtually all distributions are ROC, deferring taxes until sale, with the non‑ROC slice taxed at ordinary rates.
• MST: May receive section 1256 treatment on certain swaps/options (60/40 tax treatment), but specifics await 19a‑1 notice filings.

5‑Year Simulation: Pre‑Tax vs. After‑Tax Total Value

To gauge long‑term impact, I projected a $100 starting investment over five years under these assumptions:

• Underlying MSTR growth: 7% annually
• Tax rates: 37% ordinary, 23.8% long‑term capital gains
• MSTY: 113.51% distribution yield (all ROC)
• MST: assumed 8% distribution yield with 95% ROC (strategy target until data emerges)

The chart below shows both NAV (dashed) and after‑tax total value including distributions (solid):

• MSTY Pre‑Tax NAV plunges quickly (huge ROC distributions), but After‑Tax Total Value stabilizes around $105, reflecting heavy basis erosion and deferred taxes.
• MST Pre‑Tax NAV declines gently (modest assumed yield), while After‑Tax climbs to roughly $127 — leveraged growth plus moderate ROC distributions allow stronger compounding.

Conclusions & Considerations

1. Immediate Income vs. Compounding: MSTY’s sky‑high forward yield (≥100%) can’t overcome the drag of eroding NAV — after‑tax value barely exceeds principal after five years.
2. Leverage Factor: MST’s leveraged exposure, even with a modest yield assumption, supports higher after‑tax growth, assuming underlying MSTR rallies.
3. Tax Uncertainty: MST’s tax treatment details (ROC vs. 1256 gains) await formal disclosures. Investors should watch upcoming 19a‑1 notices closely.
4. Risk Profile: Both ETFs concentrate in single‑stock volatility — MST adds leverage risk and compounding anomalies; MSTY is simpler but suffers NAV decay.

Note on Holding MSTY or MST in a Roth IRA

• Tax‑Free Growth & Distributions: Since Roth IRAs use after‑tax dollars, all qualified distributions — whether ordinary income, ROC, or capital gains — grow and are withdrawn tax‑free.
• No Basis Erosion Concern for Taxes: Although ROC still reduces your ETF cost basis and NAV over time, you won’t owe taxes on that basis reduction or any future gains when you take qualified Roth distributions.
• Watch for UBTI: If MST uses leveraged swaps that generate Unrelated Business Taxable Income, your IRA could face its own tax liability; check each fund’s 19a‑1 notice for any UBTI disclosures.

For an authoritative overview directly from the source, see the IRS’s guide on Unrelated Business Income Tax:

• Unrelated Business Income Tax

Bottom Line: For pure income in tax‐advantaged accounts, MSTY may appeal — but taxable investors should anticipate deferred tax and capital erosion. MST’s leveraged structure offers higher long‐run after-tax growth in this scenario, though it carries greater complexity and risk. Always align ETF choice with your tax bracket, account type, and risk tolerance.

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