Elon Musk’s sales of Tesla Stock last week came as little surprise to those who followed its history potential tax burden of $ 10 billion to $ 15 billion on stock options granted in 2012. However, according to accountants, most of his sales don’t appear to be tax-related – which could mean he’ll be offloading far more shares than expected.
The options on Musk’s 23 million shares expire in August, which is the deadline for filing taxes with California and the Internal Revenue Service. Musk began exercising the options on November 8th. He exercised $ 2.5 billion in stocks and sold $ 1.1 billion of those exercised options to pay taxes.
“The common stock was sold solely to meet the tax withholding obligations of the reporter in connection with the exercise of stock options,” said a footnote from its Securities and Exchange Commission submission for November 8th.
On Monday, Musk sold an additional $ 930 million in shares to pay taxes on options he exercised on 2.1 million shares. This brings his total option exercise to approximately $ 4.6 billion and his shares sold to meet tax withholding obligations to $ 2 billion.
Most of the sales over the past week, however, were for another reason. Instead of selling by exercising an option, Musk began selling his existing shares. Auditors said it would be impractical for Musk to use these existing stocks to pay the tax on his options because they carry a much higher tax burden.
Musk’s options are taxed as normal income as they are considered compensation. The combined state and California rates could be up to 54%. The exercise price of the options is $ 6.24 per share, and Tesla’s share price was over $ 1,160 per share on Monday, so he would pay higher taxes – more than $ 10 billion on his earnings of over $ 20 billion U.S. dollar.
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Typically, executives sell the exercised stock immediately after purchase to pay taxes in what is known as the “cashless” exercise. Since the shares are sold immediately, there is no additional capital gains tax on the shares sold.
Since Musk’s sales were pure stock sales with little or no cost base as of Nov. 9, he would owe long-term capital gains taxes of up to $ 1.3 billion. Using these proceeds to pay option tax would amount to paying taxes twice – once on capital gains and once on options.
“It would not make sense for him to use this income for the option tax from a tax perspective,” said Toby Johnston, partner in charge of the Silicon Valley office of Moss Adams, an accounting, advisory and wealth management firm.
Musk acknowledged that the regular stocks are less tax efficient than selling the option stocks. “An attentive observer would find that my share sales rate (low base) significantly exceeds my option exercise rate of 10 billion (high base), closer to tax maximization than minimization,” he tweeted on Sunday.
Given the relatively high tax cost, why is Musk selling the non-option stocks? Tax experts and Tesla analysts say he will exercise the options before August, as their expiry would leave billions on the table, along with additional ownership of the company even after taxes are paid. That means he has billions left to exercise and billions to sell to pay taxes.
The $ 5.7 billion and any additional non-option stocks he sells are direct payouts. While he owes state capital gains taxes on the sales, he likely does not need to pay state taxes on the profits since he is likely now a Texas tax resident. However, the same rule does not apply to his option taxes as these are considered employee benefits and were earned during his stay in California.
Accountants say the sales are likely not to charity as he would have simply donated valued stocks instead of selling and paying a capital gains tax first. He could use the proceeds for Space X, its privately held space company, or for another private company. Or he might just want to take money off the table after years of being stock rich, cashless and borrowing his stock price to fund his lifestyle. Federal taxes are also likely to rise next year, which creates an additional incentive if he’s already thinking about a payout.
Whatever the reasons, Musk will likely end up selling way more than the $ 10 billion to $ 15 billion he needs in taxes. He conducted a Twitter poll on November 6th in which he asked his followers to sell 10% of his shares and said he would stick to the results. When he voted, 58% of respondents said he should sell 10% of his stock, which could add up to over $ 20 billion in sales.
“Taxes aren’t always the main driver behind investment decisions for people his level,” said Johnston. “It still feels like the puzzle is missing a piece that we may not know about.”