This income is reported on Form 1041 line 8, Other Income. It's also reported in box 5 of the beneficiary's Schedule K-1 (Form 1041) for taxation on the beneficiary's individual tax return. Capital losses will be passed through separately in box 3 or 4 as appropriate.
It was a mistake to have taxes withheld. The credit for tax withholding cannot be passed through on the Schedule K-1, so the estate will need to receive any tax refund it is due and will pay that to the beneficiary when it is received.
