Taxes are not the only reason Elon Musk is selling Tesla shares

Elon Musk’s sale of Tesla shares last week did not come as a surprise to those who followed the story of his potential $ 10 billion to $ 15 billion tax bill on stock options granted in 2012. appears to be tax related – this could mean that it is dumping much more inventory than expected.

The options for Musk’s 23 million shares expire in August, which is also the deadline for the California IRS tax bill. Musk began exercising options on November 8. He sold $ 2.5 billion in shares and sold $ 1.1 billion in taxes.

“The common shares were sold solely to meet the reporting entity’s tax obligations related to the exercise of share options,” reads a note to its Securities and Exchange Commission. innings on 8 nov.

Musk then sold another $ 930 million in shares on Monday to pay taxes on options he exercised on 2.1 million shares. Thus, the total value of his options is about $ 4.6 billion, and the number of shares sold to meet tax withholding obligations is $ 2 billion.

However, most of the sales in the past week were for a different reason. Instead of selling options, Musk started selling his shares. The accountants said it would be impractical for Musk to use these existing shares to pay tax on his options, as they carry a much higher tax liability.

Musk options are taxed as regular income as they are considered compensation. The combined federal and California rate can be as high as 54%. The exercise price of the options is $ 6.24 a share and Tesla’s share price was over $ 1,160 a share on Monday, so he will pay higher taxes – over $ 10 billion on profits in excess of $ 20 billion.

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Typically, executives sell the sold shares as soon as they are purchased to pay taxes, which is called “cashless settlement.” Since the shares are sold immediately, there is no additional capital gains tax on the shares sold.

Since Musk’s sales, which began Nov. 9, were direct sales of stocks with little or no cost, he would owe up to $ 1.3 billion in long-term capital gains tax debt. Using this income to pay taxes on options would mean paying taxes twice – once on capital gains and once on options.

“From a tax standpoint, it wouldn’t make sense for him to use that proceeds to pay taxes on options,” said Toby Johnston, partner who heads Moss Adams’ Silicon Valley office, an accounting, consulting and management company.

Musk admitted that common stocks are less tax efficient than selling options stocks. “A careful observer would notice that my (low base) stock rate is significantly higher than my 10 billion option strike rate (high base rate), which is closer to maximizing taxes than minimizing,” he wrote on Sunday.

So why is Musk selling stocks without options given their relatively high tax base? Tesla tax experts and analysts say it will continue to exercise the options until August, as if allowed to expire, billions will remain on the table, as well as added company property, even after taxes. This means it still has billions of reserves to use and billions to sell to pay taxes.

$ 5.7 billion and any additional non-option shares he sells are direct payments. While he owes federal capital gains tax on sales, he probably won’t have to pay state taxes on profits as he is probably now a Texas tax resident. However, the same rule does not apply to his options taxes, as they are considered employee benefits and earned while they were in California.

The accountants say the sales are unlikely to be related to charity, as he would simply donate the valued shares rather than first selling and paying capital gains tax. He could use the proceeds for Space X, his private space company, or some other private enterprise. Or he might just want to clear the table after years of being rich in stocks and poor in cash and borrowing against his stock to fund his lifestyle. Federal taxes are also likely to rise next year, which will create additional incentive if he has already considered cashing out.

Whatever the reason, Musk will likely end up selling far more than the $ 10 billion to $ 15 billion he needs to pay taxes. On November 6, he conducted a Twitter poll in which he asked his followers if he should sell 10% of his shares and said he would stick with the results. In a vote, 58% of those who responded said he should sell 10% of his shares, which could mean total sales of over $ 20 billion.

“For people of his level, taxes are not always the main factor in making investment decisions,” Johnston said. “It still feels like the puzzle is missing a piece that we might not know about.”

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