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Elon Musk selling Tesla stock, but taxes unlikely to be only reason, say experts

CNBCTV18 logo CNBCTV18 17-11-2021 Kanishka Sarkar
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Elon Musk is exercising options and selling his Tesla shares, however, the move is not just to avoid a potential tax bill of over $10 billion, experts said.

They believe if Musk was selling the stock only to pay the tax bill, he would not have continued selling additional shares. He could offload more stock than expected, the experts added.

The Tesla CEO is selling shares to meet tax withholding obligations related to stock options granted to him in 2012, which will expire in August. He started exercising the options on November 8 and sold shares worth $1.1 billion to pay taxes after exercising $2.5 billion options.

A Securities and Exchange Commission filing for the sale on November 8 said, “The shares of common stock were sold solely to satisfy the reporting person’s tax withholding obligations related to the exercise of stock options.”

Musk exercised his options again on November 15 to buy 2.1 million stocks at $6.24 each and then sold 934,091 shares for $930 million.

In all, Musk has exercised options of $4.6 billion and sold shares of $2 billion to meet tax withholding obligations.

However, most of the stocks he sold last week were from his existing shares in Tesla rather than options. This has alarmed accountants who believe it would be impractical for Musk to use existing shares to pay the tax as they would attract a higher tax bill.

As stock options are considered as compensation for tax purposes, Musk’s options will be taxed as ordinary income. If Musk sells them, he will be taxed at 37 percent top ordinary-income levels, 3.8 percent net investment tax and another 13.3 percent by the state of California since the options were awarded when he was residing there. This takes the total federal and state tax rate to 54.1 percent and his total tax bill would be more than $10 billion on his gain of over $20 billion at the current price.

To avoid additional capital gains tax, most executives sell their exercised share options immediately after purchasing them. However, Musk’s straight stock sales from November 9 would attract a long-term capital gains tax of nearly $1.3 billion.

“It wouldn’t make sense from a tax perspective for him to use those proceeds for the options tax,” Toby Johnston of accounting, consulting and wealth management firm Moss Adams told CNBC.

According to tax experts and Tesla analysts, Musk will continue selling the non-option stock despite the high tax costs along with exercising the options before August. The non-option shares are his straight cash-outs.

As a resident of Texas, he no longer has to pay state taxes on the gain, but he would still owe federal capital gains taxes on the sales.

Experts believe Musk could use the proceeds for his privately held space exploration firm Space X or other private ventures. He could also cash out to fund his lifestyle. Another reason for him to take the cash out of the table could be talks of higher federal taxes from next year.

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

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