Form 2439: Shareholder Notice of Undistributed Long-Term Capital Gains?
Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) must deliver Form 2439 to shareholders to report undistributed long-term capital gains under IRS regulations. Shareholders of mutual funds must report most capital gains on Form 1099-DIV. If the fund business keeps these gains, it must pay taxes for shareholders and file Form 2439.
Understanding Form 2439: Undistributed Long-Term Capital Gains Notice to Shareholder
RICs and REITs employ IRS Form 2439 to notify shareholders of undistributed long-term capital gains. Retention of capital gains is uncommon. Regulations mandate fund companies to distribute most gains to investors through capital gains distributions. Funds often make capital gains in November and December but inform investors beforehand. This applies primarily to actively managed funds, which engage in more portfolio trades. Index funds have more stable portfolios, resulting in predictable financial gains.
Shareholders with tax-free accounts, including IRAs, can file a Form 990-T to obtain a tax return on fund company taxes paid. Federally taxed shareholders must raise their share basis. They subtract the fund company’s Form 2439 taxes from its capital gains. Add that difference to the previous cost basis.
For shareholders who do not possess retained gains, Form 2439 must be used to report profits and taxes on Form 1040, Schedule D, line 11.
When companies file Form 2439, they need to fill out Copies A, B, C, and D for each shareholder that the RIC or REIT taxed on undistributed capital gains under sections 852(b)(3)(D) or 857(b)(3)(C). When filing Form 1120-RIC or 1120-REIT at the proper IRS service center, they should attach Copy A of all Forms 2439. Deliver Form 2439 Copies B and C to the shareholder by the 60th day after the RIC or REIT’s tax year ends. Maintain Copy D for RIC or REIT records.
IRS Form 2439 is online.
Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains: Pros and Cons
Capital gains allocations and distributions have similar net effects for shareholders. Investors who get capital gains dividends in cash pay taxes on the gain and reinvest the rest in new shares, which should yield similar results to those who receive a Form 2439 from the fund.
Due to its higher revenue, the fund firm may pay a higher tax rate on its gains than the individual. Declaring the dollar amount paid on Form 1040 lets the shareholder profit from the fund company’s tax rate difference.
Conclusion
- RICs—mutual and exchange-traded funds—and REITs must disclose undistributed long-term capital gains to shareholders using IRS Form 2439.
- Instead of disbursing capital gains, a fund business must pay taxes and file Form 2439.
- Capital gains allocations and distributions have similar net effects for shareholders.
