Usually, a mutual fund distributes all of its capital gains to its shareholders, and these gains are reported on Form 1099-DIV. In some cases, though, a mutual fund may keep some of its capital gains and pay a tax on them. When this happens, you’ll receive a Form 2439: Notice to Shareholders of Undistributed Long-Term Capital Gains from the mutual fund company.
You need to report these capital gains even though you don’t actually receive them. The good news is that since the mutual fund paid tax on them, you can report the amount of tax paid on your Form 1040. This means that you get to take a credit for the corporate taxes paid by the mutual fund.
If you enter the information from your Form 2439 in the Undistributed Capital Gains (Form 2439) section of the Interview, the H&R Block software will take care of correctly reporting all the information.
You also need to increase the basis of your mutual fund shares by the difference between the amount of undistributed capital gains you report and the amount of taxes that were reported to you as paid.