Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains

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 Real Estate Investment Trusts (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.

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.

Companies that need to file Form 2439 should complete Copies A, B, C, and D for each shareholder for whom the regulated investment company (RIC) or real estate investment trust (REIT) paid tax on undistributed capital gains under section 852(b)(3)(D) or 857(b)(3)(C). Then, they should attach Copy A of all Forms 2439 to Form 1120-RIC or Form 1120-REIT when it is filed at the appropriate IRS service center. Furnish Copies B and C of Form 2439 to the shareholder by the 60th day after the end of the RIC’s or the REIT’s tax year. Retain Copy D for the RIC’s or REIT’s records.

Form 2439 is available on the IRS website.

Advantages and Disadvantages of Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains

The net result of a capital gains allocation is essentially no different to the shareholder than a capital gains distribution. In distribution, the investor who receives a capital gains dividend in cash pays taxes on that gain, then reinvests the remainder in new shares, which should create very similar results to the investor who receives a Form 2439 from the fund.

One potential difference between a capital gains allocation and a capital gains distribution is that, because it falls into a higher income bracket, the fund company likely pays a higher tax rate on the gains that it retains, while the individual may be subject to a lower rate. By reporting the dollar amount paid by the fund company on their individual Form 1040, the shareholder may benefit from the discrepancy between the fund company’s tax rate and their own.