Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains Overview Form 2439 is an IRS notice RICs (regulated investment companies — mutual funds and ETFs) and REITs must give shareholders when the fund retains and pays tax on long-term capital gains instead of distributing them. The form reports the shareholder’s share of undistributed long-term capital gains and the tax the fund paid on the shareholder’s behalf. When and why it’s used
* Funds typically distribute capital gains to shareholders. When a fund elects to retain gains and pay the tax itself, it issues Form 2439 to affected shareholders.
* This situation is uncommon but most likely near year-end when funds realize gains through trading.
* Index funds, with less trading, generally generate fewer and more predictable capital gains than actively managed funds.
What shareholders must do
* Report the amounts shown on Form 2439 on their federal tax return (Schedule D of Form 1040). The form provides the information needed to report the undistributed long-term capital gain and the credit for taxes paid by the fund.
* Adjust the cost basis of fund shares: subtract the tax reported by the fund (on Form 2439) from the capital gain reported on the form, then add that net amount to the prior cost basis.
* Even if the shareholder never received cash, the gain and associated tax must still be reported.
Tax treatment for tax-advantaged accounts
* If shares are held in a tax-exempt account (for example, an IRA), the account owner may be able to file Form 990-T to seek a refund of taxes paid by the fund on undistributed gains.
Filing and delivery requirements for RICs and REITs
* Prepare Copies A, B, C, and D of Form 2439 for each affected shareholder.
* Attach Copy A of all Forms 2439 to the fund’s Form 1120-RIC or Form 1120-REIT when filing with the IRS.
* Furnish Copies B and C to each shareholder by the 60th day after the end of the fund’s tax year.
* Retain Copy D for the fund’s records.
* Form 2439 is available from the IRS.
Practical impact
* Economically, a capital gains allocation reported on Form 2439 produces results similar to a direct capital gains distribution (the investor is taxed on the gain).
* One possible difference: the fund may pay tax at a different rate than the shareholder’s individual rate. When the fund pays at a higher corporate/trust rate, the shareholder may benefit if their individual long-term capital gains rate is lower, because the form reports the tax paid on their behalf.
Key takeaways
* Form 2439 notifies shareholders of retained long-term capital gains and tax the fund paid on their behalf.
* Shareholders must report the gain on their tax return and adjust their cost basis accordingly.
* Funds must issue specific copies of the form and attach Copy A to their corporate tax return; shareholders must receive their copies within 60 days after year end.
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