- Elon Musk is facing a tax bill of more than $15 billion on stock options in the coming months.
- Musk asked his 62.7 million Twitter followers over the weekend if he should sell 10% of his Tesla holdings.
- The tax bill is likely a sell-off of Tesla stock this year, regardless of the outcome of the Twitter vote.
Tesla CEO Elon Musk faces a tax bill of more than $15 billion on stock options in the coming months, making the sale of his Tesla stock this year likely regardless of the Twitter vote.
Musk asked his 62.7 million Twitter followers over the weekend if he should sell 10% of his Tesla holdings. “Having a tax evasion instrument has made a lot of unrealized gains lately, so I propose to sell 10% of my Tesla stock,” he tweeted.
The Tesla CEO said he would “follow the results of this poll, no matter what.” The results were 58% in favor of the sell and 42% against it, suggesting he would sell the shares.
No matter the poll results, Musk will have started selling millions of shares this quarter. Reason: Tax bill of over $15 billion.
Musk was given options under a compensation plan in 2012. Because he doesn’t take a salary or cash bonus, his wealth comes from stock awards and gains in Tesla’s share price. The 2012 award was for 22.8 million shares at a strike price of $6.24 per share. Tesla shares closed Friday at $1,222.09, which means their gain on the shares is just under $28 billion.
The company also recently disclosed that Musk has used his shares as collateral, and with the sale, Musk may be looking to repay some of those debt obligations.
As Tesla noted in its third-quarter Securities and Exchange Commission 10-Q filing this year: “If the price of our common stock declines significantly, Mr. Musk may be required to sell shares by one or more banking institutions.” could be forced. Tesla common stock to meet its debt obligations if it could not do so by other means. Any such sale could result in a further decline in the price of our common stock.”
The options expire in August next year. Yet in order to use them, Musk has to pay income tax on the profits. Since options are taxed as employee benefits or compensation, they will be taxed at the top ordinary-income levels, or 37% plus 3.8% net investment tax. He would also have to pay the 13.3% top tax rate in California because options were granted and earned most when he was a California tax resident.
The combined state and federal tax rate would be 54.1%. So the total tax bill on his options would, at the current price, be $15 billion.
Musk has not confirmed the size of the tax bill. But he tweeted: “Note, I don’t take any cash salary or bonuses from anywhere. I only own stock, so the only way for me to personally pay taxes is to sell stock.”
Since the CEO has limited windows to sell the stock, and Musk likely wants to hold off sales for at least two quarters, analysts and tax experts expect Musk to start selling in the fourth quarter of 2021.
In an appearance at the Code conference in September, Musk said: “I have a bunch of options expiring early next year, so … a big block of options will sell out in Q4 — because I have or They’ll be finished.”
Musk, of course, could borrow more than his Tesla shares, which now total more than $200 billion. Yet it has already pledged 92 million shares to lenders to borrow cash. When asked at the Code Conference about borrowing against such volatile stocks, he said, “Stocks don’t always go up, they go down too.”
Musk is still racking up options beyond those offered through Tesla’s 2012 pay package. In March 2018, Tesla’s board of directors presented him with an unprecedented “CEO Performance Award” consisting of 101.3 million stock options (adjusted for a 5-for-1 stock split in 2020) in 12 milestone-based tranches.
–Businesshala’s Lora Kolodny