What Is Form 2439? Undistributed Gains, Basis, and Reporting

IRS Form 2439 is a notice from a mutual fund or real estate investment trust telling you it earned long-term capital gains on your shares, kept the money instead of paying it out, and already paid federal tax on those gains. You still owe tax on the gain as if you had received it, but you get credit for the tax the fund paid and you raise the cost basis of your shares to avoid being taxed twice when you eventually sell.

Why a Fund Sends You This Form

Regulated investment companies, which include most mutual funds, and REITs normally distribute nearly all of their taxable income to shareholders each year.¹ Sometimes a fund keeps certain long-term capital gains instead. When it does, the fund pays federal income tax on those retained gains at the 21-percent corporate rate and issues Form 2439 to every affected shareholder.²

The tax code treats each shareholder at the close of the fund’s year as having earned the designated gain and as having paid the tax the fund actually remitted.³ That “deemed paid” rule is what gives you both a refundable credit and the basis adjustment.

When Form 2439 Arrives

The fund must send you Copies B and C within 60 days after the end of its tax year.² For a calendar-year fund that means late February. These retained gains do not appear on Form 1099-DIV, so you can miss them if you are only watching for the usual year-end tax documents.⁴ Keep both copies. You will need Copy B when you file.

What the Boxes Mean

The form has five numbered boxes.

Box 1a: Total Undistributed Long-Term Capital Gains

The full amount of long-term capital gains the fund retained and allocated to your shares. This is the figure you report as income even though no cash reached you.² Boxes 1b, 1c, and 1d split this total into subcategories taxed at different rates; they are not additional gains on top of 1a.

Box 1b: Unrecaptured Section 1250 Gain

Gains from depreciable real property, taxed at a maximum rate of 25 percent.⁵ Most common when the fund holds significant real estate.

Box 1c: Section 1202 Gain

Gain from qualified small-business stock the fund held more than five years. Part of it may be excluded from your income under the qualified small-business stock rules. The fund must attach a statement with the details you need to apply the exclusion.² Follow the Schedule D instructions for the exclusion.

Box 1d: Collectibles (28% Rate) Gain

Gains from collectibles such as precious metals or art, taxed at a maximum rate of 28 percent.⁵ Section 1202 gain is not included here. If Box 1d has an amount, complete the 28% Rate Gain Worksheet in the Schedule D instructions.²

Box 2: Tax Paid by the Fund

The federal income tax the fund already paid on the Box 1a gain. You are treated as having paid it, so it becomes a refundable credit on your return.³ If your personal capital gains rate is below the 21 percent the fund paid, the difference comes back to you.

How to Report It on Your Return

Three moves cover the reporting.

Enter Box 1a on Schedule D, Line 11. It folds into your net capital gain or loss for the year.⁶
Enter Box 2 on Schedule 3 (Form 1040), Line 13a. That adds the credit to your total payments.⁶
Attach Copy B if you file on paper. If you e-file, confirm your software carries the Box 2 credit into total payments on Form 1040.²

If Boxes 1b, 1c, or 1d have amounts, expect additional worksheets in the Schedule D instructions. Most tax software handles them once the Form 2439 fields are entered.

Raise Your Cost Basis

Because you paid tax on gains you never received, you raise the cost basis of your fund shares so the same growth is not taxed again at sale. Increase your basis by the difference between the gain reported in Box 1a and the credit claimed in Box 2.⁶ If Box 1a is $5,000 and Box 2 is $1,050, basis goes up by $3,950. Record the adjustment now and keep the form. Skipping this step means overstating your gain and overpaying tax when you eventually sell.⁴

2026 Long-Term Capital Gains Rates

The Box 1a gain is taxed at federal long-term capital gains rates that depend on filing status and taxable income. For tax year 2026:⁷

0 percent on taxable income up to $98,900 (married filing jointly), $66,200 (head of household), or $49,450 (single and married filing separately).
15 percent above the 0-percent threshold and up to $613,700 (married filing jointly), $579,600 (head of household), $545,500 (single), or $306,850 (married filing separately).
20 percent above the 15-percent threshold.

Boxes 1b and 1d keep their own maximum rates of 25 percent and 28 percent regardless of income. Any Section 1202 gain in Box 1c may qualify for a partial or full exclusion before a rate applies.

Net Investment Income Tax

An extra 3.8 percent may apply if your modified adjusted gross income is above $250,000 (married filing jointly), $200,000 (single), or $125,000 (married filing separately).⁸ Long-term capital gains count as net investment income, so the Box 1a amount feeds into the calculation on Form 8960.

What Happens If You Ignore the Form

The fund reports these gains to the IRS separately, so the agency knows what belongs on your return. Leaving it off can trigger an accuracy-related penalty of 20 percent of the resulting underpayment,⁹ and interest runs on top until the balance is paid.¹⁰

Forgetting the basis adjustment is the quieter mistake. Your records will show a lower basis than you actually have, and a future sale will look like a bigger gain than it really is. The IRS may waive penalties for reasonable cause and good faith, but the reliable fix is to make the basis change and file the form away with your records the year you receive it.

1
Internal Revenue Service. Instructions for Form 1120-RIC (2025) – Section: Distribution Requirements
2
Internal Revenue Service. Form 2439 (Rev. November 2021) Notice to Shareholder of Undistributed Long-Term Capital Gains
3
Office of the Law Revision Counsel. 26 USC 852 Taxation of Regulated Investment Companies
4
Internal Revenue Service. Publication 550 (2024) Investment Income and Expenses – Section: Undistributed Capital Gains of Mutual Funds and REITs
5
Office of the Law Revision Counsel. 26 USC 1 Tax Imposed – Section: Maximum Capital Gains Rate
6
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) – Section: Undistributed Capital Gains
7
Internal Revenue Service. Revenue Procedure 2025-32 – 2026 Adjusted Items
8
Office of the Law Revision Counsel. 26 USC 1411 Imposition of Tax
9
Internal Revenue Service. Internal Revenue Manual 20.1.5 Return Related Penalties
10
Internal Revenue Service. Penalties