Tesla CEO Elon Musk tweeted about proposed taxes on unrealized gains, and possibly selling stock. His followers want him to sell, which might just be Musk’s best move.
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Tesla
‘s iconoclastic CEO Elon Musk made waves over the weekend when he asked his millions of
Twitter
followers if he should sell Tesla stock, creating a taxable event. It generated comments from the government and sparked additional debate over the taxation of the ultrawealthy.
Igniting a Twitter (ticker: TWTR) firestorm might have been Musk’s endgame. He might, however, just be making smart tax-planning decisions. But no, the Twitter poll isn’t a hidden way to avoid paying taxes on some of his stock options.
If Musk abides by the poll and chooses to sell long-held Tesla (
TSLA
) stock, then the gains on sale will be taxed as long-term capital gains, explains accounting expert Robert Willens. What’s more, selling in 2021 would allow Musk to avoid higher rates if those being proposed by the Biden Administration become law.
Right now, most long-term capital gains—which are gains from investments held for more than one year—are taxed at 15% up to about $500,000 in taxable income and taxed at 20% beyond that level of income. Some of the president’s tax proposals would tax capital gains for high earners as ordinary income. The top marginal tax rate on ordinary income in the U.S. today is about 37%.
“People have been looking at this …for a while,” explains Willens. “They are looking to protect the value of their life’s work.” Willens, who was a top-ranked accountant on Wall Street for years before forming his own firm in 2008, believes some increased M&A activity this year has been driven by the potential for higher tax rates in years to come.
Musk could save $3 billion to $4 billion in federal tax, depending on what changes the Biden Administration can implement.
It’s not certain where Musk would source the stock for a sale, though. Tesla didn’t return a request for comment. He could sell existing stock and/or obtain stock through vested options and sell those shares. In that latter case, the difference between the award price in the stock option and the stock price—or the gain from exercising and selling—would be taxed as ordinary income. That type of transaction isn’t subject to capital-gains accounting.
There is no taxable event for executives with stock options until they are exercised. “He cannot avoid …ordinary income …on exercise of the stock options even if he were to hold the stock purchased on exercise,” says Willens. “Whether he holds or disposes of the option stock is entirely irrelevant.” The gain on exercise is essentially management compensation and will be taxed like anyone’s regular paycheck.
Stock options are a little different for executives receiving restricted stock units, or RSUs. Those are taxable when they vest—or when the executive has earned them.
Musk’s compensation is mostly stock options. In fact, he has no base salary. In 2018, Tesla awarded Musk options to purchase 101,320,210 shares that vest in 12 separate tranches based on performance milestones. As of the date of the 2021 Tesla proxy statement, six of the 12 tranches have vested. That means Musk has about 50 million of the options from the 2018 award available for exercise. Those options require Musk to pay about $70 per share.
He also has about 23 million in vested stock options from an older 2012 award. Those have a strike price of about $6.
Tesla stock closed Monday at 1,162 a share, down 4.9% Monday. News that a boatload of Tesla stock might be hitting the open market—and diluting the company’s share count, if sourced from options exercises—sent shares down 4.9% to a close of $1,162. The
S&P 500
and
Dow Jones Industrial Average
rose 0.1% and 0.3%, respectively.
At current prices, the implied gain in the vested options from Musk’s 2018 award is more than $100 billion. What’s more, Musk holds about 170 million Tesla shares worth roughly $200 billion.
Write to Al Root at allen.root@dowjones.com