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Tesla
CEO Elon Musk sold more stock on Monday.
He’s been selling for weeks after weighing in on the debate over billionaire taxation via a Twitter poll. poll. All the sales mean Musk will end up paying billions in federal income taxes in 2021. The sums are huge, but is Musk maximizing his taxes or minimizing his taxes? And are the sales a sign of bearishness or bullishness? The answer to those questions depend on a few factors.
Monday’s sales were more of Musk’s prearranged plan to exercise expiring management stock options. Musk bought about 2.1 million shares for $6.24 a piece and sold about 934,000 to cover the taxes.
Musk didn’t have to exercise those options in 2021. He could have waited until the middle of 2022. If Tesla (ticker: TSLA) stock keeps rising then early exercise ends up being a bullish trade and tax minimization strategy.
The main reason for those conclusions is the difference in taxation for long-term capital gains and for regular income. Capital gains are generally taxed at a lower rate than regular income.
Management stock options get taxed as regular income when they are exercised. The income earned is the difference between the current stock price and the price embedded in the option, multiplied, of course, by the number of options exercised.
After the income tax is paid, the new cost basis for the shares held is the stock price at exercise. So for Musk on Monday, he bought Tesla stock at $6.24 a share. He’s paying income tax on the difference between $6.24 and the roughly $970 average price at exercise. After all the transactions, Musk ended up with another 1.2 million shares with a new tax basis of the $970 average price. Gains from $970 to whatever Tesla stock hits will likely be taxed as long-term capital gains.
“If you’re optimistic about the stock’s prospects, the idea would be to exercise the options as soon as they vest. By doing so, you effectively convert ordinary compensation income into capital gains and, therefore, avail yourself of the much lower rate at which capital gains are taxed,” explained accounting expert Robert Willens.
This, however, is a very theoretical exercise. There is no guarantee any stock will go up. What’s more, there is no guarantee tax rates on income or long-term capital gains for the ultra-rich will remain static over time.
It’s also impossible to know exactly what Musk was thinking when he devised the strategy to exercise his expiring options. Tesla and Musk haven’t returned requests for comments about this sale or prior sales. He might have been thinking about his total tax bill or he might have felt a desire to pay the tax early, like the Twitter poll in November suggested.
Whatever his reasoning, his sales have been an overhang for Tesla stock. Shares have fallen about 21% since Musk conducted his poll. The
S&P 500
and
Dow Jones Industrial Average
have declined about 1% and 2%, respectively over the same span.
Musk has sold roughly 12 million shares worth $13 billion in 680 or so separate transactions. It’s been a slow process that may be keeping bullish investors from adding to their Tesla positions. They would prefer to add after all the selling is done.
There is still a ways to go for investors with these stock sales. Monday is the seventh time Musk has exercised and sold in roughly the same amounts. There are probably five more options tranches to exercise and sell before Musk is done with the options awarded in 2012.
When he is done with all those, Musk will have sold about 17 million shares since early November, generating an estimated tax bill of roughly $15 billion.
Write to Al Root at allen.root@dowjones.com
Read More: Tesla’s Musk Sold More Shares. It Might Mean He’s Bullish on the Stock While Minimizing