IRS Form 2438 – In the complex world of tax compliance for investment entities, IRS Form 2438 plays a crucial role. This form, officially known as the Undistributed Capital Gains Tax Return, helps regulated investment companies (RICs) and real estate investment trusts (REITs) manage their tax obligations on capital gains that aren’t distributed to shareholders. Whether you’re a fund manager, tax professional, or investor seeking clarity, this SEO-optimized guide covers everything you need to know about Form 2438, including who must file it, how to complete it, and key filing requirements. We’ll draw from official IRS sources to ensure accuracy and relevance as of 2026.
What Is IRS Form 2438?
IRS Form 2438 is a specialized tax return used by RICs and REITs to calculate and report income tax on undistributed capital gains. These entities can elect to designate such gains under Internal Revenue Code sections 852(b)(3)(D) for RICs or 857(b)(3)(C) for REITs, allowing them to retain earnings while paying the associated tax directly. This form ensures that the tax is paid at the corporate level, preventing double taxation when gains are eventually distributed.
The form is typically attached to the entity’s primary tax return, such as Form 1120-RIC for RICs or Form 1120-REIT for REITs. It’s revised as of December 2020, with no major updates reported in recent years, making it stable for current use. Undistributed capital gains refer to net capital gains that aren’t paid out as dividends, and this form computes the 21% tax rate on the designated portion.
Who Must File IRS Form 2438?
Not every investment entity needs to file Form 2438—it’s specifically for those electing to designate undistributed capital gains. Here’s a breakdown:
- Regulated Investment Companies (RICs): Mutual funds and similar entities that qualify as RICs under IRC Section 851 must file if they choose to retain capital gains rather than distribute them.
- Real Estate Investment Trusts (REITs): REITs qualifying under IRC Section 857 follow suit for undistributed gains.
- Special Note for Multi-Fund RICs: If a RIC operates multiple funds (e.g., series funds), each fund files its own separate Form 2438.
If your entity doesn’t elect this designation, you won’t need to file. However, filing allows shareholders to receive Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains), which they can use to claim a tax credit or refund.
When and Where to File Form 2438?
Timing is critical to avoid penalties. File Form 2438 by the 30th day after the end of your tax year—typically December 31 for calendar-year filers, meaning a due date of January 30. Attach it to your Form 1120-RIC or 1120-REIT, and mail to the IRS Service Center in Kansas City, MO 64999.
For tax payments:
- Use the Electronic Federal Tax Payment System (EFTPS) for deposits.
- If you miss the EFTPS deadline (by 8 p.m. Eastern time the day before due), opt for same-day wire payment.
Late filings require a statement explaining reasonable cause to potentially waive penalties.
Step-by-Step Instructions: How to Complete IRS Form 2438?
Filling out Form 2438 involves reporting short-term and long-term capital gains, calculating net figures, and applying the tax rate. Here’s a line-by-line guide based on the official form structure.
Header Information
- Enter the name of the fund or REIT.
- Provide the Employer Identification Number (EIN).
- Include the address: number, street, room/suite, city, state, and ZIP code. Use a physical address if different from a P.O. box.
Part I: Short-Term Capital Gains and Losses (Assets Held One Year or Less)
This section details gains/losses from assets held ≤1 year.
| Line | Description | Key Details |
|---|---|---|
| 1-2 | Asset Details | List description (e.g., “100 shares of Z Co.”), date acquired/sold, sales price (gross or net), cost/basis, and gain/loss. Adjust basis for special elections like section 311 of the Taxpayer Relief Act of 1997. |
| 2 | Installment Sales | Enter short-term gain from Form 6252, line 26 or 37. |
| 3 | Unused Capital Loss Carryover | Attach computation; enter as a negative. |
| 4 | Net Short-Term Gain/Loss | Combine lines 1-3. Report net gain on Form 8949 as “Net short-term capital gain from line 4, Form 2438.” |
Part II: Long-Term Capital Gains and Losses (Assets Held More Than One Year)
Similar to Part I but for longer-held assets.
| Line | Description | Key Details |
|---|---|---|
| 5 | Asset Details | Columns mirror Part I for description, dates, price, basis, and gain/loss. |
| 6 | Gain from Form 4797 | Enter from column (g), line 7 or 9. |
| 7 | Installment Sales | Enter long-term gain from Form 6252, line 26 or 37. |
| 8 | Net Long-Term Gain | Combine lines 5-7. |
Part III: Summary of Parts I and II
This calculates the undistributed amounts and tax.
| Line | Description | Key Details |
|---|---|---|
| 9a | Net Capital Gain | Excess of line 8 over line 4 (if loss). |
| 9b | Capital Gain Dividends | Enter distributed amounts. |
| 10 | Undistributed Capital Gains | Line 9a minus 9b. |
| 11 | Designated Undistributed Gains | Portion under sections 852(b)(3)(D) or 857(b)(3)(C). |
| 12 | Non-Designated Undistributed Gains | Line 10 minus 11; report on Form 8949 as “Undistributed capital gains not designated (from Form 2438).” |
| 13 | Capital Gains Tax | Multiply line 11 by 21% (0.21). |
Sign the form with an authorized officer’s signature, title, and date. If using a paid preparer, include their details, PTIN, and firm info.
Penalties for Non-Compliance with Form 2438
Failing to file or pay on time can result in:
- Late Filing Penalty: 5% of unpaid tax per month (up to 25%), with a minimum of $435 if over 60 days late (adjusted for inflation).
- Late Payment Penalty: 0.5% of unpaid tax per month (up to 25%).
- Waivers possible with reasonable cause explanation.
Maintain records for as long as they may be relevant to tax administration.
Related Forms and Resources
- Form 2439: Issued to shareholders for credit on undistributed gains.
- Form 8949 and Schedule D: For reporting gains/losses.
- Form 1120-RIC/REIT: Primary returns to attach Form 2438.
- Download the PDF: IRS Form 2438 PDF.
For more details, visit the IRS website or consult a tax advisor.
Conclusion: Mastering Form 2438 for Tax Efficiency
IRS Form 2438 is essential for RICs and REITs looking to optimize capital gains management. By understanding its purpose, requirements, and completion process, you can ensure compliance and avoid costly penalties. Always use the latest version from the IRS site and seek professional guidance for complex scenarios. This guide is based on current IRS publications to help you navigate undistributed capital gains tax returns effectively.