Real reason behind Elon Musk’s Twitter poll to sell 10% of Tesla stock

Elon Musk’s poll about selling Tesla stock sent the world into a frenzy, but the real reason he’s selling might be a mammoth tax bill.

Tesla CEO Elon Musk could be facing a big tax bill. Picture: AFP

The price of Tesla stock dropped three per cent on Monday after Elon Musk proposed selling 10 per cent of his substantial holdings.

In a Twitter poll on Saturday, the Tesla CEO asked his 62.6 million followers whether he should sell 10 per cent of his shares.

“Much is made lately of unrealised gains being a means of tax avoidance, so I propose selling 10 per cent of my Tesla stock. Do you support this?” the world’s richest man asked.

More than 3.5 million people voted in the poll, with 57.9 per cent voting yes.

“I was prepared to accept either outcome,” Mr Musk said afterwards.

The poll was widely interpreted as a response to the proposed “billionaires tax” being pushed by US Democrats.

Oregon Senator Ron Wyden has proposed a new tax on unrealised gains on publicly traded assets for some of the wealthiest Americans.

Elon Musk is the world’s richest man with a net worth of about US$338 billion. Picture: AFP

Tesla’s market capitalisation is about US$1.22 trillion and Mr Musk owns 193.3 million Tesla shares - worth about US$250 billion.

His proposal to sell 10 per cent of prompted Social Capital CEO Chamath Palihapitiya to write on Twitter, “We are witnessing the Twitter masses deciding the outcome of a $25 billion coin flip.”

Looming tax bill

However, the real reason Mr Musk is selling the stock is likely a looming US$15 billion tax bill.

CNBC reports Mr Musk was awarded options in 2012 as part of a compensation plan.

Mr Musk does not receive a salary or cash bonuses - his wealth comes entirely from stock awards and the gains in Tesla’s share price.

His total net worth is estimated to be US$338 billion, according to Bloomberg.

The 2012 award was for 22.8 million shares at a strike price of $6.24 per share. Tesla shares closed at $1,222.09 on Friday, meaning his gain on the shares totals just under US$28 billion.

Those options expire in April next year - and to exercise them, Mr Musk must pay the income tax on the gain.

Elon Musk faces a tax bill of more than US$15 billion in the coming months. Picture: AFP

The bill could even exceed US$15 billion if income tax, a federal surtax on financial income, and capital gains tax in California — where Musk was a tax resident until the end of 2020 — are taken into account.

“It was well known that Musk had a big tax bill coming due from his 23 million stock options awarded in 2012,” wrote Dan Ives, an analyst for Wedbush Securities.

Mr Musk did not say when he might be selling any shares but confirmed a sale is his only way to settle his tab with US authorities.

“Note, I do not take a cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock,” he tweeted.

Bank loans

The executive has also used his Tesla shares as collateral to obtain bank loans to finance some of his investments, thus a share sell-off could allow him to repay part of those debts.

In a filing with the US Securities and Exchange Commission in 2017, Tesla submitted that banking institutions had made extensions of credit Mr Musk, a portion of which was used to purchase shares of common stock.

“We are not a party to these loans, which are partially secured by pledges of a portion of the Tesla common stock currently owned by Mr. Musk,” Tesla wrote in the filing.

“If the price of our common stock were to decline substantially and Mr. Musk were unable to avoid or satisfy a margin call with respect to his pledged shares, Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock in order to remain within the margin limitations imposed under the terms of his loans. Any such sales could cause the price of our common stock to decline further.”

The episode, described by one analyst as “another bizarre soap opera”, is the most recent example of real world trouble following the often provocative tweets from one of the world’s richest people.

- with AFP