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Wednesday, January 26, 2022

Why would Elon Musk end up with an $11 billion tax bill this year?

by Chris Isidore | CNN Business

Elon Musk says his tax bill will be $11 billion this year, and he’s probably right: The filings he made with the Securities and Exchange Commission about his recent stock trades back a large number of them.

Musk reveals a total of $11 billion in one tweet on sunday which was otherwise short on details.

It’s not much different from what he tweeted last week when, in the midst of a Twitter war with Sen. Elizabeth Warren, he said he would pay the biggest personal tax bill in history this year.

This will be a big change from the recent few years. An investigation by ProPublica found that Musk and fellow billionaires such as Jeff Bezos and Michael Bloomberg legally paid zero in income tax in 2018.

Musk, the world’s richest man, receives neither a cash salary nor a bonus. Instead they are paid through stock options, giving them the right to buy Tesla shares at a price equal to the market price at the time the option was issued, but likely to be substantially less than their value at the time of their exercise. Is.

Musk received 25.5 million split-adjusted options in 2012, and 22.9 million of those options were vested in subsequent years as Tesla hit certain operating and financial targets. But he didn’t have to pay taxes on those options until he used them to buy shares.

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Since that block of options is set to expire in August 2022, Musk finally began the process of converting them into shares of stock in early November. And he documented those trades in SEC filings, just as company insiders are required to do.

When he exercises the options, the value of the newly purchased shares is taxed as income — a 40.8% rate for someone in Musk’s tax bracket.

And that’s where the big tax bill comes in.

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As part of the process of exercising the options, Musk is selling a portion of the newly acquired shares to cover the withholding tax payable on the trades, according to his filing. Those sales totaled 7.5 million shares, bringing in $7.8 billion so far, which includes the exercise price.

In addition to selling the shares he acquired exercise options, he also sold some 5.4 million shares that he had held in the trust since the beginning of the process, although those sales would be taxed at a lower, longer-term capital gains rate. 20%.

So, all told, the federal tax bill on his 2021 stock trades comes to about $8.4 billion.

But that probably isn’t done yet.

Musk is exercising his options and selling some of those shares as part of a pre-arranged plan to allow company insiders to trade the stock without accusing him of trading on inside information. allows for.

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