Elon Musk is selling stock because he is facing a $15 billion tax bill, which is most likely the real reason he is selling.
- Elon Musk faces a tax bill of more than $15 billion on stock options in the coming months.
- Over the weekend, Musk asked his 62.7 million Twitter followers if he should sell 10% of his Tesla stock.
- Regardless of the outcome of the Twitter vote, a sell of Tesla stock this year is expected due to the looming tax bill.
Elon Musk, the CEO of Tesla, is expected to face a tax bill of more than $15 billion on stock options in the coming months, making a sale of his Tesla stock this year likely regardless of the Twitter vote.
Over the weekend, Musk asked his 62.7 million Twitter followers if he should sell 10% of his Tesla stock. He wrote, "Much has been made recently about unrealized gains being a way of tax avoidance, thus I propose selling 10% of my Tesla stock."
"I will abide by the results of this poll, whichever way it goes," Tesla CEO Elon Musk said. The findings showed 58 percent in favour of selling and 42 percent opposed, indicating that he will sell the shares.
Musk would have likely began selling millions of shares this quarter regardless of the poll's outcome. The cause is a $15 billion tax bill that is impending.
Musk was awarded options as part of a compensation package in 2012. Because he does not receive a salary or cash bonus, his wealth is derived from stock awards and increases in the value of Tesla's stock. The award in 2012 was for 22.8 million shares at a strike price of $6.24. On Friday, Tesla shares finished at $1,222.09, bringing his total gain on the shares to just under $28 billion.
Musk has recently disclosed that he has taken out loans using his shares as collateral, and with the sales, he may be able to pay off some of those loan obligations.
"If the price of our common stock were to decline substantially, Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock to satisfy his loan obligations if he could not do so through other means," Tesla said in its third-quarter Securities and Exchange Commission 10-Q filing this year. Any such sales could lead to a further drop in the price of our common stock."
The options will expire in August of the following year. Musk, though, must pay income tax on the gain in order to exercise them. The options will be taxed at top ordinary-income levels, or 37 percent plus the 3.8 percent net investment tax, because they are treated as an employee benefit or pay. Because the options were issued and primarily earned while he was a California tax resident, he will also have to pay the state's top tax rate of 13.3 percent.
The state and federal tax rates will be combined at 54.1 percent. At the present price, his options would result in a total tax liability of $15 billion.
Musk hasn't said how much the tax bill will cost. "Note, I do not receive a cash salary or bonus from anyone," he tweeted. I only have stock, thus selling shares is the only method for me to pay taxes personally."
Because CEOs have a limited window in which to sell stock, and Musk would most likely want to spread his sales out across at least two quarters, analysts and tax experts have predicted Musk will begin selling in the fourth quarter of 2021.
"I have a boatload of options that are expiring early next year, so... a significant block of options will sell in Q4 — because I have to or they'll expire," Musk stated at the Code conference in September.
Musk could, of course, borrow additional money against his Tesla stock, which is now valued at over $200 billion. Despite this, he has already committed 92 million shares to lenders in order to obtain cash. "Stocks don't always go up, they also go down," he noted at the Code conference when asked about borrowing against such volatile assets.
Musk is still racking up options in addition to those granted via Tesla's 2012 compensation package. Tesla's board of directors awarded him an extraordinary "CEO Performance Award" in March 2018, consisting of 101.3 million stock options in 12 milestone-based tranches (adjusted for the 5-for-1 stock split in 2020).