Tesla CEO Elon Musk will face a tax bill of over $15 billion over the next months for stock options. This makes it likely that he sells his Tesla stock this year regardless of the outcome of the Twitter vote.
Musk asked his 62.7million Twitter followers whether he should sell 10% his Tesla holdings. Musk tweeted, "Much has been made recently of unrealized gains as a way to tax avoidance. So I propose selling 10% my Tesla stock."
Tesla CEO Elon Musk said that he would "abide" by the results of the poll. According to the results, 58% voted for selling shares and 42% voted against. This suggests that he will be selling the shares.
No matter what the poll results, Musk would likely have started selling millions shares this quarter regardless of them. Reason: A looming tax bill exceeding $15 billion.
As part of his compensation plan, Musk was granted options in 2012. Musk doesn't receive a salary nor a cash bonus. His wealth is derived from stock options and gains in Tesla's share prices. The 2012 award was for 22.8million shares at $6.24 per share. Tesla shares closed Friday at $1,222.09, which means that his gain on shares is just below $28 billion.
Musk recently revealed that he has taken out loans using shares as collateral. With the sale, Musk might want to repay some of these loan obligations.
Tesla stated in its third quarter Securities and Exchange Commission 10-Q filing this past year that "if the price of our common stocks were to fall substantially, Mr. Musk could be forced by one of the banks to sell shares Tesla common stock to pay his loan obligations." The price of our common stock could fall further if such sales occur.
These options will expire in August next year. Musk must pay income tax to be able to exercise the options. The options are treated as employee benefits or compensation and will therefore be subject to the top ordinary income levels of 37% plus the 3.8% investment tax. Since the options were granted while he was California tax resident, he will have to pay 13.3% tax.
The combined federal and state tax rates will be 54.1%. At the current price, the total tax bill for his options would be $15 billion.
Musk has not confirmed the amount of the tax bill. Musk tweeted that he does not accept any cash bonus or salary from anyone. Since I have only stock, the only way to pay taxes is to actually sell it.
Analysts and tax experts expect Musk to begin selling stock in the fourth quarter 2021, as CEOs have very limited window of opportunity to sell stock.
Musk made a September appearance at the Code conference and stated that he had a lot of options that expire early next year. So... a large block of options will be sold in Q4 because I must or they'll expire.
Musk could borrow even more against Tesla shares that now exceed $200 billion. Musk has pledged 92,000,000 shares to lenders to secure cash borrowing. He said that stocks don't always rise, but they can also fall when asked about borrowing against volatile shares at the Code conference.
Musk continues to accumulate options beyond the 2012 pay package. Tesla's board granted Musk a record-setting "CEO Performance Award" in March 2018. It included 101.3 million stock options, adjusted for the 5-for-1 stock split in 2020, in 12 milestone-based tranches.
Lora Kolodny, CNBC, contributed to this report.
