Capital gain distributions are paid, or credited to your account, by mutual funds (regulated investment companies), or real estate investment trusts. They are treated as long-term capital gains, regardless of how long you owned your shares. Distributed capital gains are reported in box 2a of Form 1099-DIV.
Undistributed Long-Term Capital Gains
The mutual fund or real estate investment trust (REIT) may keep their capital gains and pay tax on them. In this case, they will be reported on Form 2439, Notice to Shareholders of Undistributed Long-Term Capital Gains, but you must still pay tax on them. You report these undistributed gains on Schedule D, Capital Gains and Losses.
Part or all of the undistributed capital gains may correspond to one or more of the following categories, and this will be indicated on Form 2439:
· Unrecaptured section 1250 gain (box 1b). This must be included in the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D. There it will be included with any amounts you may have to report from Schedule 4797 to determine the amount subject to tax.
· Section 1202 gain from qualified small business stock (box 1c). You can generally exclude half this gain if the qualifying small business stock was held for more than five years. The taxable part would be a 28% gain. You report the entire gain on Schedule D and directly below the amount of the gain, you report the excludable amount in parentheses.
· Collectibles (28%) gain (box 1d). This must be included in the 28% Rate Gain Worksheet in the Schedule D instructions.
The tax paid by the mutual fund or REIT is reported in box 2 of Form 2439. You take credit for this tax on your personal Form 1040 on the line for “Other payments” in the Payments section of the return, checking the box for Form 2439.