Musk’s share sale hides a mystery. The tax amount of the two schemes differs by nearly $10 billion


Tencent technology news on November 10, there are almost certainly many reasons behind Tesla CEO Elon Musk’s decision to sell shares on a large scale for the first time in many years. Perhaps this is to please Tesla’s investors, or to provide cover for him to spread his wealth, or even to prove why he needs to sell shares to pay taxes.
But for whatever reason, and in whatever way, the world’s richest man will have to pay billions of dollars in taxes to the Internal Revenue Service (IRS). However, how much tax musk pays to the government will depend on many factors. He never specified how long it will take to sell 10% of Tesla shares.
More importantly, musk may argue that his recent move from California to Texas means he doesn’t have to pay heavy taxes in California. Another important consideration is how musk defines his ownership: does he only calculate Tesla common stock, or does he also include stock options?
According to the details of Musk’s stock ownership analyzed from Tesla’s regulatory declaration documents, it may be divided into two situations: first, musk can sell 10% of his common shares at any time, totaling about 17 million shares. Second, musk may sell 10% of the total number of his common shares and stock options, mainly through the exercise of his option contract that will expire in August next year, but this will mean higher tax bills.
Hypothesis 1
The filing document does not disclose the average cost of musk holding 170.5 million Tesla shares. For the stocks of companies acquired in Tesla’s start-up stage, such costs may be close to zero. Over the years, musk has increased his holdings of shares through stock option awards obtained as compensation through open market purchase and exercise, and the cost of such shares is higher.
But in any case, Musk’s cost of buying Tesla shares is negligible relative to Tesla’s closing price of $1222.09 last Friday. According to the statistics of Bloomberg billionaire index, Musk’s wealth mainly comes from Tesla shares, but there are also SpaceX shares. His net assets are estimated to be $338.4 billion.
Assuming musk only sells 10% of his common shares, he can get a profit of $20.8 billion, but he needs to pay 20% federal capital gains tax and 3.8% net investment tax, and 13.3% personal income tax to California, with a total tax amount of about $7.7 billion. But if he paid taxes in Texas without personal income tax, he could save $2.7 billion.
Hypothesis 2
In addition to 170.5 million ordinary shares, musk has 82 million exercisable stock options. These contracts give him the right to buy Tesla shares at a cost much lower than the current trading price. Together, he will hold 252.5 million shares.
About 22.9 million options held by musk expire within nine months, which means that he must use these contracts to buy shares before that, otherwise these contracts will expire. For convenience, the billionaire may choose to exercise these shares now, sell them immediately, and then sell 2.38 million ordinary shares to meet the 10% threshold he set for himself.
Unlike ordinary shares, the gains realized by exercising stock options are counted as ordinary income, which will enable musk to pay a higher tax bill. Assuming musk sells the option, he can earn $27.8 billion, but he needs to pay high tax rates of 54.1% and 40.8% in California and Texas respectively. When selling common shares, it can obtain $29.1 billion in income, with California and Texas tax rates of 37.1% and 23.8% respectively. Taken together, musk needs to pay $16.1 billion in taxes in California and $12 billion in taxes in Texas.
In addition to federal and state taxes, there are numerous other factors that may affect Musk’s tax bill. Past charitable donations or other losses and deductions may help him offset part of the tax. (reviewed by Tencent technology / Jinlu)