What Is Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains?
Form 2439 is an Internal Revenue Service (IRS) form that Regulated Investment Companies(RICs)–mutuals funds and exchange-traded funds–and (REITs) are required to distribute to shareholders in order to report undistributed long-term capital gains. Mutual funds are required to distribute most capital gains to shareholders, and the shareholders report these gains on Form 1099-DIV. However, if the fund company decides to retain these gains, it must pay taxes on behalf of shareholders and report these transactions on Form 2439.
Key Takeaways
- Form 2439 is an IRS form that Regulated Investment Companies (RICs)–mutuals funds and exchange-traded funds–and Real Estate Investment Trusts (REITs) are required to distribute to shareholders in order to report undistributed long-term capital gains.
- If a fund company decides to retain its capital gains, rather than distribute them to shareholders, it must pay taxes on behalf of shareholders and report these transactions on Form 2439.
- The net result of a capital gains allocation is essentially the same for the shareholder as a capital gains distribution.
Understanding Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains
Form 2439 is produced by the U.S. Internal Revenue Service (IRS) for use by RICs and REITs to inform shareholders of long-term capital gains that it has not distributed to its investors. This retention of capital gains is relatively rare. Regulations require fund companies to disburse almost all gains to investors in a transaction known as a capital gains distribution. Funds tend to accumulate capital gains in the months of November and December, but can generally warn investors with an estimate in advance. This is particularly true of actively-managed funds, which conduct more trades within their portfolios. Index funds tend to contain more static portfolios and thus produce fewer and more predictable capital gains.
Investors whose shares are held in tax-free accounts, such as an Individual Retirement Account (IRA), may file a Form 990-T to claim a tax refund on the taxes paid by the fund company. Shareholders subject to federal taxation must also adjust the basis for their shares upward. To do so, they first subtract the taxes reported by the fund company on Form 2439 from the capital gains reported on the same form. They should then add that difference to the prior cost basis.
Form 2439 must be referenced by shareholders, even if they do not take possession of the retained gains, to report the gains and taxes on their own Form 1040, Schedule D, line 11.
Form 2439 is available on the IRS website.