Elon Musk can sell Tesla shares. Here’s the real reason for the sale.

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Tesla

Iconoclastic CEO Elon Musk created waves this weekend when he asked his millions of

Twitter

followers if he were to sell Tesla shares, creating a taxable event. It generated comments from the government and sparked further debate on the taxation of the ultra-rich.

Igniting a Twitter (ticker: TWTR) firestorm may have been Musk’s endgame. However, he can only make smart tax planning decisions. But no, the Twitter survey is not a hidden way to avoid paying taxes on any of his stock options.

If Musk follows the poll and chooses to sell Tesla which has been for a long time (

TSLA

) share, then the gain on sale will be taxed as a long-term capital gain, explains accounting expert Robert Willens. In addition, sales in 2021 will allow Musk to avoid higher prices if those proposed by the Biden administration are allowed.

Right now, most long-term capital gains – which are gains from investments held for more than a year – are taxed at 15% up to around $ 500,000 in taxable income and taxed at 20% beyond this level of income. Some of the president’s tax proposals will tax capital gains on high incomes as ordinary income. The highest marginal tax rate on ordinary income in the United States is currently about 37%.

“People have been looking at this … for a while,” Willens explains. “They are looking to protect the value of their life’s work.” Willens, who was a top-ranked accountant on Wall Street for years before forming his own company in 2008, believes that some increased M&A activity this year has been driven by the potential for higher tax rates in the years to come.

Musk could save $ 3 to $ 4 billion in federal taxes, depending on what changes the Biden administration can implement.

However, it is not certain where Musk will pick up the shares for a sale. Tesla did not return a request for comment. He could sell existing shares and / or acquire shares through vested options and sell these shares. In the latter case, the difference between the allotment price in the share option and the share price – or the gain from exercising and selling – will be taxed as ordinary income. This type of transaction is not subject to capital gains accounting.

There is no taxable event for executives with stock options until they are exercised. “He can not avoid … ordinary income … by exercising the stock options even if he were to keep the shares purchased by exercising,” Willens says. “Whether he has or disposes of the option stock is completely irrelevant.” The gain on training is mainly management compensation and will be taxed as everyone else’s regular paycheck.

Stock options are a little different for executives who receive limited stock units, or RSUs. They are taxable when they are earned – or when the manager has earned them.

Musk’s compensation is mostly stock options. He actually has no basic salary. In 2018, Tesla Musk granted options to purchase 101,320,210 shares earned in 12 separate tranches based on earnings milestones. From the date of Tesla’s power of attorney declaration from 2021, six of the 12 tranches have been earned. This means that Musk has around 50 million of the options from the 2018 allocation available for exercise. These options require Musk to pay around $ 70 per share.

He also has around 23 million in earned stock options from an older allotment from 2012. They have a redemption price of around $ 6.

The Tesla share closed at 1162 per share on Monday, down 4.9% on Monday. News that a boatload of Tesla shares could hit the open market – and dilute the company’s stock count, if taken from option exercises – sent the shares down 4.9% to a close of $ 1,162. The

S&P 500
and

Dow Jones Industrial Average
increased by 0.1% and 0.3%, respectively.

With current prices, the implied gain in the options earned from Musk’s 2018 allotment is more than $ 100 billion. In addition, Musk has around 170 million Tesla shares worth about $ 200 billion.

Write to Al Root at allen.root@dowjones.com