Tesla shares opened down around six percent this morning as Elon Musk’s weekend twitter
poll concluded that he should sell 10 per cent of his position in Tesla.
The share price has been recovering since that opening print and it is only down around
3% right now.
When Elon announced the poll on Saturday, he claimed that he would abide by its result.
If he were to go ahead with the sale, the vote would cause a huge block of Tesla shares
to hit the market.
Based on Friday’s closing price, Musk’s 17 per cent stake in Tesla was worth $208bn.
He didn’t indicate when or how he would sell the stock, but odds are it would take
a while to sell a block that large without moving the market.
Now, Musk already hinted at a conference in September that he was likely to sell shares
in the fourth quarter as he has options that expire early next year.
He was awarded options back in 2012 as part of a compensation plan where he doesn’t
take a salary or cash bonus, his wealth comes entirely from his ownership of the company
stock and stock options.
The 2012 award was for 22.8 million shares at a strike price of $6.24 per share.
Tesla shares were trading over $1,200 on Friday, meaning his gain on the share’s totals just
under $28 billion.
Now, these options expire next August, and normally you wouldn’t exercise options until
right before the expiration date – there are very few situations where it makes sense
to early exercise a call option.
It appears that Musk might want to exercise the options early as he is concerned about
tax rates going up next year.
Under US tax laws, when you exercise options like this, you have to pay income tax on the
gain.
The options are taxed as an employee benefit or compensation and taxed at 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.
In total he will pay a tax rate of just over 54%, which comes to around $15 billion dollars.
So that tax bill is something he will have to pay no matter what, but it might be smart
of him to pay the tax this year, rather than wait till next year and be faced with a possibly
higher tax rate than 54%.
So, that then leads us to ask if Musk is really selling his stock because twitter told him
to, or because this is just a good way of releasing the news to the market?
Does this style of announcement knock the stock price more or less than the sudden appearance
of a SEC Form 4 on Tesla’s website detailing the stock sales?
This is a big block of stock that might be sold, and as of the time of recording the
stock is only down around 3%.
I would think a more blunt announcement might have knocked the stock down much more than
that – he has avoided the discussions that you usually hear in such situations of whether
the CEO is selling because he has lost faith in the company.
We know that Elon is selling stock because twitter told him to and for no other reason.
OK, so, does he really need to sell the stock to make this tax payment?
Well, no, if we look at Tesla’s proxy statement from August, he already has 88m shares — over
$100bn worth of stock -- pledged as collateral “to secure certain personal indebtedness”.
Basically he has borrowed money using his stock as collateral, and this allows him access
to cash without selling stock and paying capital gains taxes.
If he didn’t want to sell the shares to pay this tax bill, his bankers would most
likely lend him the money to meet this tax liability using his shares as collateral.
So, he doesn’t have to do this.
It is worth noting that since Tesla went public in 2010, Musk has only sold stock twice, he
sold a bit more than 1.4 million shares for $24 million at the IPO, and then in 2016,
he sold 2.7 million shares for $593 million.
The thing is that one way or another he is going to be taxed on his options when he exercises
them – which he has to do between now and August.
He will be taxed on the difference between the strike price of the options ($6.24) and
the exercise price around 1200.
We can’t know exactly how his taxes are structured, but if he were to sell the block
of stock that he receives by exercising his options, he may not be paying any additional
taxes, as there might be no capital gain on that block of stock if he sells it near the
exercise price of the options.
So, his total tax will be 54% on his income.
It probably makes sense for him to sell the stock at this point, as he is being taxed
as if he sold it whether he does or not.
We of course have to wonder if Elon’s tweet was approved by the SEC mandated “Twitter
nanny” that is supposed to oversee his communications relating to Tesla?
Tesla’s settlement with the SEC requires Musk to pre-clear tweets about “events regarding
the Company’s securities (including Musk’s acquisition or disposition of the Company’s
securities).”
that might be material to shareholders with a Tesla securities lawyer.
Now in his tweet, Elon said “"Much is made lately of unrealized gains being a means of
tax avoidance, so I propose selling 10% of my Tesla stock,"
This (of course) relates to the recent discussions amongst Democrats in the United States over
a proposal to fund the increased spending by taxing billionaires' unrealized capital
gains, or the increase in value of unsold assets they hold, like stocks, bonds and real
estate.
Sen. Ron Wyden, chairman of the Senate Finance Committee, commented on Musk's poll on Saturday,
saying "whether or not the world's wealthiest man pays any taxes at all shouldn't depend
on the results of a Twitter poll."
He added that it's "time for the Billionaires Income Tax."
Elon replied to that with a rude comment – which fortunately will not have required pre-clearing
with a securities lawyer.
Senator Wyden’s proposed “billionaires tax” did get thrown out of the latest version
of the spending bill, but not before winning the endorsement of President Biden and Treasury
Secretary Janet Yellen.
Such a tax bill which would target less than 700 Americans would likely have caused huge
damage to U.S. capital markets, dwarfing whatever benefit it might provide for social programs.
Let’s use Elon Musk as an example.
Back in August 2018 Elon famously tweeted “considering taking Tesla private at $420.
Funding secured,” and then he spent the next week or so acting like it might be true.
Had he actually taken the company private at $420, he would have paid around $80 billion
for a company that today has a market cap of 1.2 trillion dollars.
Of course, as a private company there would not have been the army of retail traders who
bid the stock up between then and now to its 1.2 trillion-dollar valuation.
There would be no way of taxing Elon on the huge wealth he has accrued over the last few
years.
He could easily make the argument that the company was worth less today than it was back
then, as many of the big plans like robo taxis, the Tesla semi and the hyper loop have not
come to fruition.
There would have been numerous articles he could have pointed to saying that he overpaid.
You could easily argue that he has a net worth of 10 billion dollars, rather than 310 billion
dollars.
As the CEO of a public company, who is entirely paid in stock options, Elon will pay 15 billion
dollars in tax this year.
If he had taken the company private, he would likely be paying a lot less.
The billionaire tax as proposed is a tax that would have hit less than 700 Americans but
would have mainly impacted people like Bezos and Musk whose wealth came from public companies.
In a situation with such a tax system, there would be a huge advantage associated with
keeping a company like Tesla private.
American public capital markets have been shrinking for decades.
There are half as many public companies today as there were twenty years ago.
There has been a recent surge of IPO’s partly due to high valuations of certain types of
company and the rise of SPACS.
The billionaire tax would quickly end any comeback by imposing, a capital gains tax
on unrealized gains for a small group of Americans.
If you find this topic interesting, check out my other video – where have all the
stocks gone – where I discuss why public markets have been shrinking over the last
twenty years.
Talk to you soon, bye.