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Elon Musk appears to have wrapped up a busy year of trading his Tesla shares Tuesday. He will end up with one of the largest tax bills in history to show for it.
The Tesla CEO exercised options to buy another 1.6 million shares, and sold 934,090 of those shares for USD 1 billion to cover the tax bite he will be facing on that purchase.
The trades completed the exercise of the 22.9 million options he held that were due to expire in August. He sold off 10.3 million of the shares he acquired throughout the process to cover his tax withholding requirements. And he did it using a pre-arranged plan that allows company insiders to sell shares in such a way that they can’t be accused of trading on insider information.
Musk was granted the options in 2012 as part of his pay package, and the options vested as Tesla (TSLA) hit various financial and operational targets in subsequent years. But he did not have to pay taxes on the options until he exercised them, which he started to do in November.
The value of the shares he acquired by exercising the options, less the nominal purchase price of USD 6.24 a share, will be taxed equal to USD 23.5 billion of regular income, a substantial sum, but still modest for the world’s richest person, whose net worth Forbes has estimated to be USD 280 billion. With a top tax rate of 40.8%, he faces of a federal tax bill of about USD 10.7 billion from the exercise of these shares.
Although Musk could have waited until 2022 to exercise these options, he faced the risk of an 8 percentage point higher tax bill if Congressional Democrats and the Biden administration pass the Build Back Better legislation. Although that bill currently appears unlikely to become law, it was still very much in play when Musk set up his pre-arranged trading plan, meaning there was still a significant risk of a higher tax bill if he waited until next year.
In early November, Musk also sold an additional 5.4 million shares that he had held in trust. The total 15.7 million shares he sold this year put some downward pressure on the price of Tesla stocks, as the average sale price he received on Tuesday of USD 1,091.73 is down 11% from the record high close before the start of his trades. But Tesla (TSLA) shares have rallied in the last week and are up 54% so far this year through Tuesday’s close.
Record Tax
Those 5.4 million shares Musk sold out of his trust are most likely shares he held since the time of the company’s 2010 initial public offering, stocks he received in return for investments he made in Tesla in its early days. Rather than being taxed as income, the proceeds of those sales will be taxed at the lower, long-term capital gains rate of 20%. But that will still increase his taxes by USD 1.2 billion, bringing his 2021 federal tax bill to USD 10.7 billion.
Musk started selling off some of his shares in November after he conducted a poll on Twitter asking his millions of followers if he should sell 10% of his Tesla stock in order to raise his taxable income. The poll said he should.
