Elon Musk, the world’s richest person who famously doesn’t have any cash, will have to cash out 10 percent of his ownership in Tesla (TSLA), a stake worth more than $20 billion, per the majority vote of his Twitter followers.
On Saturday, Musk launched a poll on Twitter, asking his 62.7 million fans to vote on whether he should sell 10 percent of his Tesla stock to settle the recent controversy over the “billionaire tax”.
“Much is made lately of unrealized gains being a means of tax avoidance, so I proposed selling 10 percent of my Tesla stock,” he wrote, adding in a follow-up tweet that he would “abide by the results of this poll, whichever way it goes.”
The poll ended with 57.9 percent participants voting “yes” out of more than 3.5 million votes. Musk owns 193.3 million Tesla shares, representing 20.7 percent of the company, which was valued at $1.22 trillion at Friday’s close. A 10 percent sale at Tesla’s current share price will cash out about $25 billion and likely trigger extreme volatility in future stock price.
Tesla shares tumbled 5 percent in pre-hour trading Monday morning, ending a month-long monster rally.
Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock.
Do you support this?
— Lorde Edge (@elonmusk) November 6, 2021
However, a CNBC report on Sunday noted that Musk might have to sell a chunk of Tesla stock regardless of the Twitter poll result because of a looming tax bill on a block of soon-to-expire stock options he owns.
In 2012, Musk was awarded a set of stock options as part of his performance-based compensation plan. The options would allow him to buy 22.8 million Tesla shares at a price of $6.24 apiece. Tesla’s share price has appreciated nearly 200 times since then, representing a $28 billion increase in value on his awarded options.
Those options will expire in August 2022. In order to bag the gain, Musk will have to exercise his options before the expiration date and pay taxes on the profit—the difference between market price and the price at which he purchases those shares. Since what Musk has are nonqualified stock options, according to Tesla’s SEC documents, the gain will be taxed as ordinary income at the 37 percent top federal tax rate plus the 3.8 percent net investment tax. He will also have to pay the 13.3 percent top tax rate in California, where he has been a tax resident.
That’s a total tax rate of 54.1 percent. Given the size of his stock options, Musk will have to pay about $15 billion in taxes.
“They are a ticking tax time bomb,” Brian Foley, an independent executive compensation consultant, told The New York Times. “Offhand I can’t think of any way for him to get around paying the tax.”
Dumping Tesla shares he already owns will result in a smaller, but still massive, tax bill. Realized gains on regular stock sales are taxed as capital gains. The top tax rate is about half that of ordinary income.
During an appearance at the Code conference in September, Musk said he will begin exercising some of his stock options in the fourth quarter “because I have to or they’ll expire.”