There might be a fairly simple reason behind Elon Musk’s weekend Twitter poll on whether he should sell 10% of his Tesla shares. The planet’s richest man has a looming tax bill of more than $15 billion.
CNBC reports that Musk was awarded options in 2012 as part of a compensation plan and because he doesn’t take a salary or cash bonus, his wealth comes from stock awards and the gains in Tesla’s share price.
The 2012 award was for 22.8 million shares at a strike price of $6.24 per share. Tesla shares closed at $1,222.09 on Friday, meaning his gain on the shares totals just under $28 billion, according to CNBC.
Those options have since vested and will expire in August, according to The New York Times. Most stock grants allow executives to avoid paying taxes for years, and perhaps forever, as long as they don’t sell the shares they get from converting the options, but Musk has taken out big loans against his shares, allowing him to monetize shares without selling them, the NYT adds.
Brian Foley, an executive compensation consultant, told the NYT that because of the way they were structured, it’s likely that Musk’s options, if exercised, won’t qualify for the preferential tax treatment.
“They are a ticking tax time bomb,” Foley said
In its third-quarter Securities and Exchange Commission (SEC) filing, Tesla disclosed that Musk has taken out loans using his shares as collateral, according to the filing.
“If Elon Musk were forced to sell shares of our common stock that he has pledged to secure certain personal loan obligations, such sales could cause our stock price to decline,” according to the filing.
“Certain banking institutions have made extensions of credit to Elon Musk, our Chief Executive Officer, a portion of which was used to purchase shares of common stock in certain of our public offerings and private placements at the same prices offered to third-party participants in such offerings and placements,” according to the filing.
“We are not a party to these loans, which are partially secured by pledges of a portion of the Tesla common stock currently owned by Mr. Musk. If the price of our common stock were to decline substantially, Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock to satisfy his loan obligations if he could not do so through other means. Any such sales could cause the price of our common stock to decline further.”
CNBC notes that as the options are taxed as an employee benefit or compensation, they will be taxed at top ordinary-income levels, or 37% plus the 3.8% net investment tax. He will also have to pay the 13.3% top tax rate in California since the options were granted and mostly earned while he was a California tax resident. Combined, the state and federal tax rate will be 54.1%. So the total tax bill on his options, at the current price, would be $15 billion, CNBC said.
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