What Is IRS Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains?
IRS Form 2439 is required by Regulated Investment Companies (RICs) such as mutual funds and exchange-traded funds, as well as Real Estate Investment Trusts (REITs), to inform shareholders about undistributed long-term capital gains. Mutual funds typically must distribute most capital gains to shareholders, who then report these gains using Form 1099-DIV. However, if a fund opts to retain these gains, it must pay the corresponding taxes on behalf of its shareholders and report this through Form 2439.
Key Takeaways
- Mandatory Reporting: Form 2439 is essential for RICs and REITs to communicate undistributed long-term capital gains to shareholders.
- Tax Implications: If capital gains are retained by the fund, it has to handle tax payments on behalf of its shareholders, reported via Form 2439.
- Equal Outcome: For shareholders, the overall financial impact of capital gains allocation mirrors that of receiving capital gains distributions.
An In-Depth Look at Form 2439
Form 2439 is issued by the IRS and utilized by RICs and REITs to notify shareholders about undistributed long-term capital gains. Though retaining such gains is relatively rare, it happens primarily in November and December, aligning with fund companies’ capital gains accumulation periods. Actively-managed funds are more likely to retain capital gains due to frequent trading, unlike index funds which have more static portfolios, creating fewer, consistent capital gains.
Investors with holdings in tax-free accounts, such as Individual Retirement Accounts (IRAs), may invoke Form 990-T to refund taxes the fund company paid. Shareholders who are federally taxed need to adjust their shares’ cost basis accordingly by deducting the taxable amount mentioned on Form 2439 from the reported capital gains, adding this difference to the prior cost basis.
Despite not possessing the retained gains, shareholders must still refer to Form 2439 while filing their Form 1040, Schedule D, line 11.
Fund companies filing Form 2439 must complete and distribute Copies A, B, C, and D for each affected shareholder. Copy A should be attached to Form 1120-RIC or Form 1120-REIT for IRS submission within the specified timeframe. Shareholders receive Copies B and C, while Copy D stays with the fund company for records.
Form 2439 can be accessed directly from the IRS website. Reminder: the specifics on any tax form should always be reviewed along with relevant IRS guidelines.
Pros and Cons of Form 2439 Utilization
Capital gains allocation and distribution essentially offer a similar financial outcome for shareholders. In distributions, shareholders receive capital gains dividends as cash, pay taxes, and reinvest the remaining amount in new shares. This closely parallels recipients of Form 2439 who incur equivalent taxes, benefiting similarly by reinvestment adjustments.
One notable difference is the potential tax rate discrepancy; a fund company might pay a higher tax rate on retained gains than individual shareholders, who might face a lower individual income tax rate. Reporting the tax paid by the fund on their Form 1040 can benefit shareholders if there’s a favorable discrepancy between these rates.
Related Terms: Capital Gains, RICs, Real Estate Investment Trusts, Tax Forms, Form 1099-DIV.
References
- IRS. “2020 Schedule D”.
- IRS. “Form 2439”.
