SpaceX founder and Tesla CEO Elon Musk watches him visit the construction site of Tesla’s gigafactory in Gruenheide, near Berlin, Germany, on May 17, 2021.
Michèle Tantussi | Reuters
Elon Musk’s sales of Tesla shares last week came as no surprise to those who followed the story of his possible $ 10 billion to $ 15 billion tax bill on stock options granted in 2012. However, according to accountants, most of their sales don’t. . It appears to be tax related, which could mean that it will dump a lot more inventory than expected.
Options on Musk’s 23 million shares expire in August, which is also the deadline for the tax bill owed to California and the Internal Revenue Service. Musk began exercising the options on November 8. He exercised $ 2.5 billion in shares and sold $ 1.1 billion of exercised options to pay taxes.
“The common shares were sold only to satisfy the reporting withholding tax obligations related to the exercise of the stock options,” said a note to the Securities and Exchange Commission. presentation for November 8.
On November 9, however, its sales took a turn. Instead of selling on an options exercise, Musk began selling his existing shares. Accountants said it would be impractical for Musk to use those existing stocks to pay taxes on his options, as they result in a much higher tax bill.
Musk’s options are taxed as ordinary income because they are considered compensation. The combined federal and California rate could be as high as 54%. The exercise price of the options is $ 6.24 per share, and Tesla’s share price on Monday was above $ 1,600 per share, so it would pay higher taxes, more than 10 billion euros. dollars for his gain of more than 20 billion dollars.
Executives typically sell exercised shares immediately after purchase to pay taxes, in what is known as a “cashless” exercise. Since the shares are sold immediately, there is no additional capital gains tax on the shares sold.
Since Musk’s November 9 sales were outright stock sales at little to no cost, he would have to pay long-term capital gains taxes of up to $ 1.3 billion. Using this product to pay taxes on options would be like paying taxes twice: once on capital gains and once on options.
“From a tax standpoint, it wouldn’t make sense for him to use this revenue for options tax,” said Toby Johnston, partner in charge of the Silicon Valley office of Moss Adams, an accounting, consulting and wealth management firm. .
Musk admitted that common stocks are less tax efficient than selling optional stocks. “A careful observer will notice that my stock sell rate (low base) greatly exceeds my option exercise rate of 10b (high base), thus closer to tax maximization than minimization.” tweeted on Sunday.
So why is Musk selling the stock without options given its relatively high tax cost? Tesla’s tax experts and analysts say it will continue to exercise the options before August because letting them expire would leave billions on the table, as well as additional ownership of the company, even after paying taxes. This means that you still have billions in stock to exercise and billions to sell to pay taxes.
The $ 5.7 billion and all additional non-option shares you are selling are direct withdrawals. Although you owe federal capital gains taxes on sales, you probably won’t have to pay state income taxes because you are likely now a tax resident of Texas. The same rule does not apply to your option taxes, as these are considered employee benefits and are earned while you were in California.
Accountants say the sales likely won’t be made to charities, as he would have simply donated valued stock rather than selling and paying capital gains tax first. You could use the product for Space X, your private space company, or another private company. Or maybe you just want to take money off the table after years of being high on stocks and low on cash and borrow against your stock price to finance your lifestyle. Federal taxes are also expected to increase next year, creating an added incentive if you were already considering a withdrawal.
Whatever the reasons, Musk will likely end up selling much more than the $ 10 billion to $ 15 billion he needs for taxes. He conducted a poll on Twitter on November 6 asking his followers if he should sell 10% of his shares and said he would respect the results. In the vote, 58% of those who responded said they should sell 10% of their shares, which could represent more than $ 20 billion in total sales.
“For people at your level, taxes are not always the main factor in investment decisions,” Johnston said. “It always feels like a piece of the puzzle is missing that we may not know. “
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