- Tesla CEO Elon Musk is facing a potential tax bill of more than $10 billion on stock options granted in 2012.
- Musk began exercising options on Monday, exercising $2.5 billion in shares and selling $1.1 billion of those options to pay taxes.
- But he continued to sell additional stock, and it is likely that those sales were unrelated to the stock option exercise he would have to complete by August. This means that the stock is likely to be sold in the future.
Elon Musk’s sale of Tesla stock last week came as little surprise to those who are following the story of a potential tax bill of $10 billion to $15 billion on stock options granted in 2012. Yet according to the accountant, most of his sales don’t appear to be tied to taxes—which could mean he’ll be offloading far more stock than he expected.
Options for Musk’s 23 million shares expire in August, which is also a tax bill deadline due in 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 those options to pay taxes.
“Shares of common stock were sold only to meet the reporting person’s tax withholding obligations relating to the exercise of stock options,” said a footnote to the Securities and Exchange Commission. filing For November 8th.
On November 9, however, their sales took a turn. Instead of selling as part of an options exercise, Musk began selling from his existing shares. Accountants said it would be impractical for Musk to use those existing shares to pay taxes on his options, as they carry a very high tax bill.
Musk’s options are taxed as ordinary income, as they are considered compensation. The combined federal and California rate can be as high as 54%. The strike price on the options is $6.24 per share, and since Tesla’s stock price was over $1,600 per share on Monday, it would pay higher taxes — more than $20 billion on its gains of more than $10 billion.
Typically, executives sell the exercised shares immediately after they are purchased to pay taxes, a practice known as “cashless”. Since the shares are sold immediately, no additional capital gains tax is levied on the shares sold.
Because Musk’s sale from November 9 was a direct stock sale at little or no cost, he would have to pay long-term capital gains tax of up to $1.3 billion. Using those proceeds to pay option tax would equal paying taxes twice — once on capital gains and once on options.
“It wouldn’t make sense from a tax perspective for them to use those proceeds for the option tax,” said Toby Johnston, partner in charge of the Silicon Valley office of the accounting, consulting and wealth management firm Moss Adams.
Musk acknowledged that regular shares are less tax efficient than selling options. “A careful observer will note that my (low basis) share sale rate is significantly higher than my 10B (high basis) option exercise rate, thus closer to tax maximization than minimization,” he tweeted on Sunday.
So why is Musk selling non-option stocks given its relatively high tax cost? Tax experts and Tesla analysts say he will still exercise the options before August, leaving billions on the table along with additional ownership of the company even after paying taxes by expiring them. That means it still has billions of stock to exercise and billions to sell to pay taxes.
$5.7 billion and any additional non-option shares he sells are straight cash-outs. While he does pay federal capital gains taxes on the sales, he probably won’t have to pay state taxes on the gains, as he is now likely to be a Texas tax resident. The same rule does not apply to his option taxes, however, because they are considered employee benefits and were earned while he was in California.
Accountants say the sale is unlikely to be for charity, as they would have simply donated the appreciable shares, rather than selling and paying capital gains tax first. He can use the proceeds for his privately held space company Space X or any other private venture. Or he wanted to take money off the table after being stock-rich and cash-poor for years and borrow the price of his stock to fund his lifestyle. The federal tax is also likely to increase next year, creating an additional incentive if it was already considering a cash-out.
Whatever the reason, Musk will likely end up selling more than the $10 billion needed for taxes to the tune of $15 billion. He did a Twitter poll on 6 November asking his followers if he should sell 10% of his stock and said he would follow the results. In the vote, 58% of those who responded said they should sell 10% of their shares, which could mean more than $20 billion in total sales.
“For people in his level, taxes are not always the primary driver of investment decisions,” Johnson said. “It still seems like there’s a piece missing in the puzzle that we might not have known about.”