Musk’s Latest Twitter Gambit Opens Way to Paying Billions to IRS
Musk’s Latest Twitter Gambit Opens Way to Paying Billions to IRS
(Bloomberg) -- Elon Musk almost certainly had his reasons to crowdsource a decision about his first mass share sale in years.
Maybe it was designed to keep Tesla Inc. investors entertained -- more than 3 million people voted -- or perhaps to provide cover for him to diversify his fortune, or even to justify why he needed to sell stock to pay taxes.
Regardless, the world’s richest person will have to hand over billions of dollars to the Internal Revenue Service however he chooses to make good on his pledge.
How much Musk pays the government will depend on a variety of factors. He never specified how long it will take him to sell 10% of his stake in Tesla. What’s more, Musk may argue his recent move to Texas from California means he doesn’t have to pay the Golden State’s hefty taxes. Another big consideration is how Musk defines his ownership: does he count just common shares, or stock options, too?
Based on details of his ownership parsed from regulatory filings there are two scenarios of how it could go down.
In one, Musk could sell 10% of the common stock he holds, amounting to about 17 million shares.
In the other, Musk could sell 1/10th of his combined number of common shares and stock options, mostly by exercising his option contracts that are set to expire in August next year. This would amount to a bigger sale and a far higher tax bill.
Scenario 1
Filings don’t disclose the average cost basis of Musk’s 170.5 million shares. For those acquired in Tesla’s infancy, it’s probably close to zero. Over the years, Musk added to his stake with open-market purchases and by exercising stock options he received as compensation -- all of which have a higher cost basis.
Either way, the figure is probably a rounding error relative to Tesla’s $1,222.09 close on Friday. Musk, whose fortune is largely derived from Tesla, but also SpaceX, is worth $338.4 billion, according to the Bloomberg Billionaires Index.
The below example shows the capital-gains tax Musk would owe if he sold 10% of his common shares, assuming that those have a cost basis of zero.
Scenario No. 2
In addition to his 170.5 million common shares, Musk also has 82 million exercisable stock options -- contracts that entitle him to buy Tesla shares at prices significantly below where they currently trade. Added together, these would bring his holding to 252.5 million shares.
About 22.9 million of his options lapse in nine months. This means Musk must use the contracts to buy shares before then, or they will be void. For convenience, the billionaire might elect to exercise those now and immediately sell the shares, and then dispose of an additional 2.38 million common shares to reach the 10% threshold he set for himself.
Unlike common shares, gains realized from stock-option exercises count as ordinary income, which would subject Musk to a far higher tax bill.
There are myriad other factors that could impact Musk’s tax bill. Past charitable giving or other losses or deductions might help him offset some of it.
Tesla shares dropped as much as 7.3% on Monday as investors digested Musk’s mercurial move.
“It’s right when Tesla, the company, is smooth sailing, doing well,” Dave Lee, a Tesla investor who runs a podcast, said on a recent episode, laughing. “Right when you need some action, you know, some drama.”
©2021 Bloomberg L.P.