Why Elon Musk Will End Up With A Huge Tax Bill

(CNN Business) — Elon Musk You say your tax bill this year will be $ 11 billion, and you’re probably right: The statements you’ve made to the Securities and Exchange Commission (SEC) about your recent stock trading back up that massive figure. .

Musk revealed the total of $ 11 billion in a tweet on Sunday thatOtherwise I was short on details.

This is not significantly different from what you tweeted last week when, in the middle of a Twitter war with Senator Elizabeth Warren, said it would pay the largest individual tax bill in history this year.

That would be a massive change from some recent years. An investigation by ProPublica found that Musk, and other billionaires like Jeff Bezos and Michael Bloomberg, they legally paid zero in income taxes in 2018.

Musk, the richest person in the world, you do not earn a cash salary or a bonus. Instead, they pay you through stock options, giving you the right to buy Tesla shares at a price equal to the market price at the time the options are issued, but probably well below their value on the market. moment in which they are exercised.

Musk received 25.5 million adjusted split options in 2012, and 22.9 million of those options were consolidated in subsequent years when Tesla reached certain operating and financial targets. But you didn’t have to pay taxes on those options until you used them to buy stocks.

With that block of options expiring in August 2022, Musk finally began the process of converting them to stocks in early November. And he documented those exchanges in SEC files, as he is required to do.

When you exercise the options, the value of the newly purchased stock is taxed as income, a rate of 40.8% for someone in Musk’s tax bracket.

And that’s where the huge tax bill comes from.

As part of the options exercise process, Musk has been selling a portion of the newly acquired stock to cover withholding tax owed on the trades, according to his filings. So far, those sales have totaled 7.5 million shares, bringing in $ 7.8 billion so far, including the exercise price.

In addition to the sales of shares that he acquired by exercising options, he also sold some 5.4 million shares that he had held in trust since the beginning of this process, although those sales will be taxed at a lower rate of long-term capital gains of twenty%.

So in total, the federal tax bill on its stock trading in 2021 amounts to roughly $ 8.4 billion.

But it’s probably not over yet.

Musk exercises his options and sells some of those shares as part of a pre-arranged plan that allows company whistleblowers to trade stocks without being accused of insider trading.

Based on past trading, Musk will likely exercise at least 4.2 million more options by the end of the year, or perhaps even all of the remaining 5.7 million options that expire in August. That will likely raise your taxes by $ 1.6 billion to $ 2.1 billion.

So it will be close to a tax bill of $ 11 billion by the end of the year.

And none of these calculations involve any potential state income tax.

Musk has moved his residence, and the official home of Tesla, a Texas, which does not impose a state income tax on individuals. California’s income tax rate is the highest in the country – about 12%. Although it’s unclear how much of your income will be subject to that tax, you likely won’t completely avoid it, despite your new address.

“By the way, I will continue to pay California income taxes in proportion to my time in the state, which is and will be significant,” Musk tweeted in June.

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Why Elon Musk Will End Up With A Huge Tax Bill