Elon Musk faces $ 11 billion tax bill after selling more Tesla shares


By Chris Isidore, CNN Business

Elon Musk appears to have ended a busy year on Tuesday trading his Tesla shares. He will end up with one of the biggest tax bills in history.

The CEO of Tesla exercised options to buy an additional 1.6 million shares and sold 934,090 of those shares for $ 1 billion to cover the tax he will face on that purchase.

The transactions closed the exercise of the 22.9 million options he held and which were due to expire in August. He sold 10.3 million shares that he acquired throughout the process to cover his withholding tax requirements. And he did so using a pre-arranged plan that allows company insiders to sell shares in such a way that they can’t be accused of trading inside information.

Musk was granted the options in 2012 as part of his salary, and the options vested as Tesla achieved various financial and operational goals in the following years. But he didn’t have to pay taxes on the options until he exercised them, which he started doing in November.

The value of the shares he acquired by exercising the options, less the nominal purchase price of $ 6.24 per share, will be taxed to the tune of $ 23.5 billion of regular income, a substantial sum, but still modest for the richest person in the world, whose net worth Forbes has estimated at $ 280 billion. With a top tax rate of 40.8%, it faces a federal tax bill of approximately $ 10.7 billion from the exercise of these actions.

Although Musk could have waited until 2022 to exercise those options, he risked seeing his tax bill increase by 8 percentage points if Congressional Democrats and the Biden administration passed the Build Back Better legislation. While it currently seems unlikely that this bill will become law, it was still very much at stake when Musk put in place his pre-arranged business plan, meaning there was still a significant risk of a tax bill. higher if he waited until next year.

In early November, Musk also sold an additional 5.4 million shares that he held in trust. The total of 15.7 million shares he sold this year put downward pressure on the price of Tesla shares, as the average sale price he received on Tuesday of $ 1,091.73 is down 11% from the record closing before trading began. But Tesla shares rallied last week and are up 54% so far this year through Tuesday’s close.

A record tax bill

Those 5.4 million shares that Musk sold out of his trust are most likely shares he had held since the company’s IPO in 2010, shares he received in exchange for the investments he had made. he performed in Tesla in his early days. Rather than being taxed as income, the proceeds of those sales will be taxed at the lower long-term capital gains rate of 20%. But that will further raise his taxes by $ 1.2 billion, taking his federal tax bill from 2021 to $ 10.7 billion.

Earlier this month, Musk said in a series of tweets that his $ 11 billion in taxes would be the biggest single-year tax bill ever paid by an individual.

But that’s quite a change from his previous tax bills. Since he does not receive any cash wages or bonuses from Tesla, it is likely that he has had little or no taxable income in recent years. A ProPublica investigation found that Musk and some of his fellow billionaires, including Amazon founder Jeff Bezos and former New York City mayor Michael Bloomberg, paid no income tax in 2018. These revelations prompted some Democrats demand a “wealth tax” on the assets of the nation’s wealthiest people, rather than just their income.

Musk began selling some of his shares in November after conducting a Twitter poll asking his millions of followers if he should sell 10% of his Tesla shares in order to increase his taxable income. The poll said it should.

Recent sales represent less than 10% of his past holdings

Including the additional shares he sold on Tuesday, Musk has now sold 9.2% of the shares he held at the time of the Twitter poll. Unless he sells an additional 1.3 million shares that he now owns, he will be just short of that 10% commitment, but he said in a recent interview with a YouTuber that he “sold” enough shares to reach around 10% ”. Tuesday’s sales are therefore apparently the culmination of the year’s process.

Despite all sales in 2021, Musk now owns more shares than he had at the start of his trading frenzy, with 177.7 million shares held in trust or wholly owned, up 4% per year. compared to the $ 170.5 million he held in trust at the start.

And although the number of options has decreased by 22.9 million, he still has 59 million additional options that can be exercised as part of his 2018 salary package. These have a higher exercise price. but still a modest $ 70.01 each. These options will not expire until 2028 and therefore are unlikely to be exercised or enforced in the years to come.

And given Tesla’s forecast for future sales and profits, it’s likely that between 25.3 million and 33.8 million of these options in this 2018 package will vest in the coming months, more than to replace the ones. options he exercised this year.

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