Elon Musk, CEO of Tesla, is currently facing a $15 billion tax bill. Tax attorneys in San Jose speculate that it is likely Musk will sell some of his Tesla stock before the year is over. Musk even went as far as to conduct a poll among his 67.2 million Twitter followers this past weekend, asking them their opinion on whether or not he should sell 10 percent of his holdings in Tesla. He commented on Twitter that unrealized gains being used as a way to avoid taxes has gotten a lot of attention lately and for that reason, he proposed selling 10 percent of his own Tesla stock.
Majority of Twitter Fans Tell Musk to Sell
Forty-two percent of the followers who participated in the vote were against him selling, while 58 percent favored this option. The CEO had stated previously that regardless of which way the Twitter vote went, he would abide by the results. However, some tax planning professionals anticipated that Musk would ultimately sell regardless of his followers’ opinions. Not surprisingly, the reason for reaching out to his Twitter fans and any subsequent selling he may do in the future is due to an imminent tax bill Musk is facing, which amounts to more than $15 billion. Although this amount does not include back taxes, it is nevertheless a hefty bill for which Musk is responsible.
Musk Awarded Stock Options in 2012 Compensation Plan
In 2012, as part of a compensation plan, Musk was awarded stock options in lieu of cash bonuses and a salary. His riches essentially came from stock awards and the gains enjoyed by Tesla over the years. In 2012, the award was a total of 22.8 million shares with a strike price of $6.24. This past Friday, Tesla shares closed at $1,222.09. This means that Musk’s gain on the shares came in at a little under $28 billion.
Recently, the company has disclosed that loans were taken out by Musk and his shares were used as collateral. Some tax lawyers wonder if Musk may decide to repay a certain amount of those loans with money from the stock sales.
California State Tax Also in the Mix
Although the options expire next year in August, Musk must pay the income tax on the gain in order to exercise them. Because they are taxed as an employee compensation or benefit, the tax rate for ordinary-income is applied. This comes out to 37 percent plus a 3.8 percent net investment tax. Additionally, because the options were granted and earned primarily when Musk was a California tax resident, he is also obligated to pay California’s top tax rate of 13.3 percent.
All totaled, the federal and state tax rate comes to 54.1 percent, making the total tax bill on the aforementioned options $15 billion. The size of this tax bill has not been confirmed by Musk; however, he stated that selling stock is the only way for him to pay personal taxes. It is not the first time a wealthy American has used this tax strategy. Tax lawyers and analysts have been speculating that Musk will begin selling before the fourth quarter of 2021 comes to an end.
In September, when he appeared at the Code conference, Musk indeed remarked that a bunch of his options will expire in early 2022, and that he planned to sell a huge block in the final quarter of this year.
According to an IRS tax attorney, Musk would certainly have the option of borrowing more against his Tesla shares, which currently total about $200 billion, but the CEO did not speak of any plans to do so.