The real reason why Elon Musk is selling 10% of Tesla stock

KEY POINTS

• Elon Musk faces a tax bill of more than $15 billion in the coming months on stock options.

• Musk asked his 62.7 million Twitter followers over the weekend whether he should sell 10% of his Tesla holdings.

• The looming tax bill makes a sale of Tesla stock this year likely regardless of the outcome of the Twitter vote.

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 regardless of the Twitter vote.

Musk asked his 62.7 million Twitter followers over the weekend whether he should sell 10% of his Tesla holdings. “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock,” he tweeted.

The Tesla CEO said he would “abide by the results of this poll, whichever way it goes.” The results were 58% in favor of selling and 42% against, suggesting he will sell the shares.

No matter the results of the poll, Musk would have likely started selling millions of shares this quarter. The reason: a looming tax bill of more than $15 billion.

Musk was awarded options in 2012 as part of a compensation plan. Because he doesn't take a salary or cash bonus, his wealth comes from stock awards and the gains in Tesla's share price. The 2012 award was for 22.8 million shares at a strike price of $6.24 per share. Tesla shares closed at $1,222.09 on Friday, meaning his gain on the shares totals just under $28 billion.

The company has also recently disclosed that Musk has taken out loans using his shares as collateral, and with the sales, Musk may want to repay some of those loan obligations.

As Tesla noted in its third-quarter Securities and Exchange Commission 10-Q filing this year: “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. Any such sales could cause the price of our common stock to decline further.”

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

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

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

Since CEOs have limited windows in which to sell stock, and Musk would likely want to stagger the sales over at least two quarters, analysts and tax experts have been expecting Musk to start selling in the fourth quarter of 2021.

At an appearance at the Code conference in September, Musk said: “I have a bunch of options that are expiring early next year, so ... a huge block of options will sell in Q4 — because I have to or they'll expire.”

Musk, of course, could also borrow more against his Tesla shares, which now total over $200 billion. Yet he has already pledged 92 million shares to lenders for cash borrowing. When asked at the Code conference about borrowing against such volatile shares, he said, “Stocks don't always go up, they also go down.”

Musk is still racking up options beyond those granted via Tesla's 2012 pay package. In March 2018, Tesla's board of directors granted him an unprecedented “CEO Performance Award” consisting of 101.3 million stock options (adjusted for the 5-for-1 stock split in 2020) in 12 milestone-based tranches.

For more blockchain news, please download WikiBit - the Global Blockchain Regulatory Inquiry APP.