Elon Musk faces $ 15 billion in tax bills, which is probably the real reason he sells shares

Tesla CEO Elon Musk gestures as he visits the construction site of Tesla’s Gigafactory in Gruenheide near Berlin, Germany, on August 13, 2021.

Patrick Pleul | Reuters

Tesla CEO Elon Musk faces a tax bill of more than $ 15 billion in the coming months on stock options, making a sale of his Tesla stock this year likely independent of the Twitter vote.

Musk asked his 62.7 million Twitter followers over the weekend if he should sell 1[ads1]0% of the Tesla holdings. “A lot has been done lately of unrealized gains as a means of tax evasion, so I propose to sell 10% of my Tesla stock,” he tweeted.

The Tesla chief said he would “follow the results of this investigation, no matter which way it goes.” The results were 58% for sale and 42% against, which indicates that he will sell the shares.

Regardless of the results of the poll, Musk would probably have started selling millions of shares this quarter. The reason: a threatening tax bill of more than $ 15 billion.

Musk was granted options in 2012 as part of a compensation plan. Because he does not take a salary or cash bonus, his wealth comes from share allotments and the gains in Tesla’s share price. The allotment in 2012 was for 22.8 million shares at a redemption price of $ 6.24 per share. Tesla shares closed at $ 1,222.09 on Friday, meaning his earnings per share are just under $ 28 billion.

The company has also recently revealed that Musk has taken out a loan with its shares as collateral, and with the sales, Musk may wish to repay some of these loan obligations.

As Tesla noted in its third-quarter Securities and Exchange Commission 10-Q filing this year: “Should the price of our ordinary shares fall significantly, Mr. Musk may be forced by one or more of the banking institutions to sell shares in Tesla’s ordinary shares. “to satisfy the loan obligations if he could not do so in any other way. Any such sale may cause the price of our ordinary shares to fall further.”

The options expire in August next year. But to exercise them, Musk must pay income tax on the gain. Since the options are taxed as an employee benefit or compensation, they will be taxed at the highest ordinary income level, or 37% plus 3.8% net investment tax. He will also have to pay the top tax rate of 13.3% in California since the options were granted and mostly earned while he was a tax resident in California.

In total, the state and federal tax rate will be 54.1%. So the total tax bill on his options, at today’s price, would be $ 15 billion.

Musk has not confirmed the size of the tax bill. But he tweeted: “Note, I do not take cash salary or bonus from anywhere. I only have shares, so the only way for me to pay taxes personally is to sell shares.”

Since CEOs have limited windows to sell stocks, and Musk likely wants to shift sales over at least two quarters, analysts and tax experts have expected Musk to start selling in the fourth quarter of 2021.

Speaking at the Code conference in September, Musk said: “I have a bunch of options that expire early next year, so … a big block of options will sell in Q4 – because I have to otherwise they will expire.”

Of course, Musk can also borrow more against its Tesla shares, which now amount to over 200 billion dollars. Nevertheless, he has already pledged 92 million shares to lenders for cash loans. When asked at the Code Conference to borrow against such volatile stocks, he said: “Stocks do not always go up, they also go down.”

CNBC’s Lora Kolodny contributed to this report.

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