Taxes aren’t the only reason Elon Musk sells Tesla shares

Sales of Tesla shares by Elon Musk last week came as no surprise to those who have followed the story of his potential $ 10 billion to $ 15 billion tax bill on stock options granted in 2012. Yet , according to accountants, most of its sales do not. appear to be tax related – which could mean it will unload a lot more inventory than expected.

Options on Musk’s 23 million shares expire in August, which is also the deadline for the tax bill owed to California and the Internal Revenue Service. Musk began exercising the options on November 8. He exercised $ 2.5 billion of shares and sold $ 1.1 billion of those exercised options to pay taxes.

“The common shares were sold only to satisfy the reporting person’s withholding tax obligations related to the exercise of stock options,” says a footnote to his file with the Securities and Exchange Commission of November 8.

On November 9, however, its sales took a turn. Rather than selling on an option exercise, Musk began selling his existing shares. The accountants said it would be impractical for Musk to use those existing shares to pay tax on his options, as they result in a much higher tax bill.

Musk’s options are taxed as ordinary income because they are considered compensation. The combined federal and California rate could reach 54%. The strike price on the options is $ 6.24 per share, and Tesla’s share price on Monday was above $ 1,600 per share, so it would pay higher taxes – more than $ 10 billion on its gain over $ 20 billion.

Typically, executives sell exercised shares immediately after purchase to pay taxes, in what is known as a “cashless” exercise. Since the shares are sold immediately, no additional capital gains tax is due on the shares sold.

Since Musk’s sales from November 9 were direct stock sales with little to no cost, he would have to pay long-term capital gains taxes of up to $ 1.3 billion. . Using this proceeds to pay tax on options would be like paying tax twice – once on capital gains and once on options.

“From a tax perspective, it wouldn’t make sense for him to use this proceeds for the options tax,” said Toby Johnston, partner in charge of the Silicon Valley office of Moss Adams, a firm. accountancy, consulting and wealth management.

Musk admitted that common stocks are less tax efficient than selling option stocks. “A careful observer will note that my share sale rate (low base) greatly exceeds my 10b option exercise rate (high base), therefore closer to tax maximization than to minimization”, he tweeted on Sunday.

So why is Musk selling the stocks with no options given its relatively high tax cost? Tesla tax experts and analysts say he will still exercise the options before August because letting them expire would leave billions on the table, as well as additional ownership of the company, even after paying taxes. This means he still has billions in stock to exercise and billions to sell to pay taxes.

The $ 5.7 billion and all the extra no-option stocks he’s selling are direct withdrawals. Although he owes federal capital gains taxes on sales, he likely won’t have to pay state gains taxes because he is likely now a tax resident of Texas. The same rule does not apply to his option taxes, as these are considered employee benefits and earned while he was in California.

Accountants say the sales are likely not to charity, as he would have simply donated valued stock rather than selling and paying capital gains tax first. He could use the product for Space X, his private space company, or for another private company. Or he might just want to take money off the table after years of being high in stocks and poor in cash and borrowing against his stock price to fund his lifestyle. Federal taxes are also expected to rise next year, creating an additional incentive if he was already considering a withdrawal.

Whatever the reasons, Musk will likely end up selling way more than the $ 10 billion to $ 15 billion he needs for taxes. He conducted a Twitter poll on November 6 in which he asked his followers if he should sell 10% of his shares and said he would respect the results. In the vote, 58% of those who responded said it should sell 10% of its shares, which could represent more than $ 20 billion in total sales.

“For people at his level, taxes aren’t always the primary driver of investment decisions,” said Johnston. “It always feels like a piece of the puzzle is missing that we might not know.”