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

What is Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains)?

The Internal Revenue Service (IRS) Form 2439 must be given to shareholders by Regulated Investment Companies (RICs), mutual funds, exchange traded funds, and Real Estate Investment Trusts (REITs) in order to report unreported long-term capital gains. Most capital gains must be distributed to shareholders by mutual funds, who then report them on Form 1099-DIV. The fund firm must pay taxes on behalf of shareholders and record these transactions on Form 2439 if it chooses to keep these gains.

Form 2439, "Notice to Shareholder of Undistributed Long-Term Capital Gains," is used to notify shareholders of undistributed long-term capital gains that are attributable to owners of Real Estate Investment Trusts (REITs) and Regulated Investment Companies (RICs). Each investment will be issued a unique form 2439. These documents will be made available 90 days after the RIC's or REIT's fiscal year end. It should be noted that some RICs and REITs do not have calendar fiscal years; for further information, it is recommended to contact your tax advisor or visit the investment's website.

The entire undistributed long-term capital gains linked to your ownership of the fund are shown in Box 1a. This sum is disclosed by individuals on Schedule D, Capital Gains and Losses, of IRS Form 1040, US Individual Income Tax Return. Your allocable share of the sum shown in Box 1a, which has been identified as unrecaptured section 1250 gain from the sale of depreciable real property, is shown in Box 1b. This sum is recorded on your Uncaptured Section 1250 Gain Worksheet for people. Any federal income tax that the RIC or REIT paid on this gain on your behalf is contained in Box 2.

How Does Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains) Works ?

The U.S. Internal Revenue Service (IRS) creates Form 2439 for RICs and REITs to use when informing shareholders of long-term capital gains that haven't been delivered to investors. This capital gains retention is somewhat uncommon. According to regulations, fund companies must distribute nearly all gains to investors through a process called as a capital gains distribution. Although funds can typically forewarn investors with an estimate in advance, they tend to collect capital gains in the months of November and December. Considering that actively managed funds make more trades within their portfolios, this is especially true of them. Index funds typically have more static portfolios, which results in less and more steady capital gains.

The fund company's taxes may be refunded to investors whose shares are kept in tax-free accounts, such as Individual Retirement Accounts (IRAs), by filing a Form 990-T. The basis for shares owned by shareholders who are subject to federal taxation must also be raised. To do this, they first deduct the capital gains reported on Form 2439 from the taxes recorded on the same form by the fund firm. The former cost basis should then be adjusted to reflect the difference.

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), businesses that need to submit Form 2439 should complete Copies A, B, C, and D. (C). Then, when it is submitted at the proper IRS service centre, Copy A of all Forms 2439 must be attached to Form 1120-RIC or Form 1120-REIT. The shareholder must receive Copies B and C of Form 2439 by the 60th day following the end of the tax year for the RIC or the REIT. Copy D should be kept on file with the RIC or REIT.

Note :
Even if shareholders do not acquire possession of the retained earnings, they must nevertheless refer to Form 2439 in order to report the gains and taxes on their own Form 1040, Schedule D, line 11.

Key Facts of Form 2439, Credit for Tax on Undistributed Capital Gain

  • In order to report undistributed long-term capital gains, Regulated Investment Companies (RICs)—mutual funds and exchange-traded funds—and Real Estate Investment Trusts (REITs) are required to distribute Form 2439 to shareholders.
  • A fund company must pay taxes on behalf of shareholders and report these transactions on Form 2439 if it chooses to keep its capital gains rather than distribute them to shareholders.
  • A capital gains distribution and an allocation of capital gains have roughly the same effects on the shareholder.

Purpose of Form 2439

As in other nations, different tax laws apply in the United States of America. In this regard, the US Internal Revenue Service establishes a legal requirement for local business owners, stockholders, and entrepreneurs to pay taxes on time by completing and submitting the necessary papers.

Shareholders are required to fill this form, which is an official tax document for undistributed long-term capital gains. Investment firms or real estate investment trusts that provide tax forms and related paperwork to shareholders in the United States manage this matter. The majority of the capital gains are distributed to shareholders by these structural services, who report their income on a separate form 1099-DIV.

However, the Stock Company is also entitled to keep these profits. It must in this circumstances notify the shareholders of its operation on Additional Application 2439 and pay taxes on their behalf.

Long-term capital gains are gains from qualified investments that shareholders kept for more than a year before selling them. The difference between the asset's sale price and its acquisition price, or the sum of money the investor pays for the asset, is its sale amount. In the US, long-term capital gains are taxed at a lower rate than short-term capital gains.

Advantages and Disadvantages of Form 2439

A capital gains distribution and an allocation of capital gains have roughly the same effects on the shareholder. When a capital gains dividend is distributed, the investor who receives cash pays taxes on the gain and then reinvests the remaining money in further shares, which should produce outcomes quite similar to those of the person who receives a Form 2439 from the fund.

Because a capital gains allocation falls into a higher income band than a capital gains payout, the fund company is likely to pay a higher tax rate on the gains it retains, whereas the individual may be subject to a lesser rate. The shareholder may gain from the difference between the fund company's tax rate and their own by disclosing the dollar amount paid by the fund company on their own Form 1040.

General Rules and Requirements of Form 2439 

The taxation and distribution of this form to shareholders are regulated by the US Internal Revenue Service, Investment Companies, and trusts. Stock businesses and trusts are required by law to transfer practically all profits to shareholders and investors (the so-called capital gains distribution). These stock structures often increase their profits from November through December, alerting shareholders.

If shareholders maintain their shares in tax-free accounts, they may need to file an additional form. You can recoup the tax that the stock business has already paid using this way. Shareholders who are subject to federal taxation must increase their share base. The taxes already reported by the stock company on the form are first subtracted, and the difference is then added to the initial sum.

Stock firms are required to complete all relevant information on this application and the corresponding copies (A, B, C, and E) for each shareholder. Additionally, when it is already at the service centre, they must attach a copy A of each application to the supplementary documents. By the 60th day following the end of the tax year, you must submit the appropriate copies of B and C and retain the copy of D.

Understanding Undistributed Capital Gains (Form 2439)

All capital gains are typically distributed to owners of a mutual fund. On Form 1099-DIV, the mutual fund company reports these gains. A mutual fund, however, might decide to maintain some of its capital gains and pay taxes on them. The mutual fund provider will then send you a Form 2439. (Notice to Shareholders of Undistributed Long-Term Capital Gains).

Even though you don't really get these capital gains, you must nonetheless report them. You may, however, claim a credit for the taxes paid by the mutual fund since it paid tax on the gains.

The difference between these two elements must also be added to the base of your mutual fund shares :
  • Your reported amount of undistributed capital gains.
  • Taxes that have been reported as paid to you.
Give the amount of undistributed long-term capital gains to the shareholders of a regulated investment company (RIC) or a real estate investment trust (REIT) using Form 2439.

What Does Form 2439 Mean ?

You might be entitled to a refund if you got a Form 2439 and the RIC or REIT paid tax on your behalf. Even if your investment is housed in your IRA, this is still true. Using Form 1040X, people who have previously submitted their tax returns can make amendments. Form 990-T may be filed for investments kept in an IRA.

See the shareholder instructions on page 2 of Form 2439 for more details.

Where is Form 2439 Reported ?

Individual filers should enter this sum on line 11 of the worksheet for unrecaptured Section 1250 gains found in the Schedule D (Form 1040) instructions for 2021 or on the corresponding line in the instructions for the current year.

How to Enter Form 2439 Capital Gains in an Individual Return ?

The capital gains and taxes paid by the taxpayers must be disclosed on their income tax return. Any taxes that the issuer of your Form 2439 has paid are eligible for the Capital Gain Credit. Remember to raise your investment's basis by the difference between the gain you report and the tax credit you request.

If the undistributed capital gains are in an IRA, the custodian or trustee will receive Form 2439. Custodians of an IRA must submit Form 990-T in order to request a tax refund for already paid taxes. These financial gains shouldn't be entered here.

For capital gains included on a K-1, do not insert a Form 2439 here. Capital gains and taxes paid on a K-1 will already be included in your return.

How to Fill Out Form 2439 ?

For the correctness of the tax payment, filling out this application requires accurate data and mathematical computations. As a result, think about the guidelines below and examine all of their criteria.

1) Provide the Basic Details :
The structures of copies A, B, C, and E are identical. Include the employer's name, legal name, postal address, and identification number. For the purpose of setting up tax payments and submitting tax reports, an identification number is a digital code that designates a certain organization. This number makes it possible to locate the business providing the tax service. Don't forget to include the shareholder's social security number along with their name, address, and identification code.

2) Describe the Accounting Year :
Write the calendar year for which the tax return is being filed in the upper right corner. Fill in the lines with the proper dates. The trustee must get copies B and C of the individual pension agreement from the shareholder. To prevent misunderstandings, confirm the accuracy of the entered data numerous times.

3) Enter the Amount of the Tax Payment :
In the respective lines, enter the necessary sums. To prevent errors, we advise you to calculate your tax payments in advance. Indicate the entire amount of retained long-term capital gains on the first line. Next, enter the data using the suggested format. Please be aware that you must include this copy with the 1120-REC and 1120-REIT supplemental forms. Use our form-building software if required.

4) Complete More Copies :
This form comes in four copies, as was already mentioned. Although they have a similar structure, they serve diverse purposes. You must provide a copy of B with the shareholder's income tax return for a certain time period when completing the form. Along with the 28 percent rate increase, you also indicate the profit in the lines. Enter your information as well as that of the organization.

For the accounting of shareholders, use Copy C. By the way, if you actually hold the shares for which this form was issued, take the following action:
  • Each shareholder's completed copies A, B, C, and D of this form.
  • Put your name and address in the appropriate line under "candidate".
  • Add your name to Copy B and affix it to Copy A.
  • Use the second copy on the Internal Revenue Center.
  • Indicate in the executed copy who is the owner of the shares.
The candidate has around 90 days to finish these tasks, according the guidelines. You have 150 days if you are running for office and are also a resident of another country. Trust funds and investment firms are covered by Copy D.