Behind Elon Musk’s Twitter poll is a tax bill coming due

Elon Musk could have already been compelled to promote a large portion of his Tesla shares even when he had not issued an uncommon Twitter pledge over the weekend. Musk on Saturday polled Twitter customers on whether or not he ought to promote 10% of his stake in his firm. The ballot gave the impression to be a response to a Democratic proposal to tax the unrealized good points of billionaires.

“A lot is made currently of unrealized good points being a way of tax avoidance, so I suggest promoting 10% of my Tesla inventory,” he tweeted.

Musk mentioned he was elevating the query as a result of he doesn’t take a money wage as Tesla’s CEO and subsequently wouldn’t have any technique to pay a big tax invoice with out promoting a few of his Tesla shares, which make up the overwhelming majority of his wealth.

Musk wrote in a follow-up tweet that he would “abide by the outcomes of this ballot, whichever approach it goes.” Tesla’s shares have been down slightly greater than 3% on the information Monday.

He closed the ballot Sunday, after practically 3.5 million votes had been solid, with 58% voting for him to promote. Musk has not confirmed what he’ll do, however after closing the ballot, he tweeted, “I used to be ready to just accept both consequence.”

Both approach, Musk could quickly have wanted to promote a giant chunk of his shares. He holds practically 23 million inventory choices that have been awarded in 2012. These choices have since vested and can expire in August 2022. Most inventory grants permit executives to keep away from paying taxes for years, and maybe ceaselessly, so long as they don’t promote the shares they get from changing the choice.

However Brian Foley, an government compensation marketing consultant, says that due to the dimensions of Musk’s grant and the way in which it was structured, it’s doubtless that a lot of his 2012 choices don’t qualify for the preferential tax remedy. Which means Musk would owe revenue taxes when he workouts the grant, which at present costs could be value slightly below $30 billion. Musk’s tax invoice might prime $10 billion, relying on what share of the choices don’t qualify for the preferential remedy.

“They’re a ticking tax time bomb,” Foley mentioned of Musk’s inventory choices. “Offhand I can’t consider any approach for him to get round paying the tax.”

What’s extra, Musk could have to promote much more shares than what it could take to pay his tax invoice. He owns 17% of Tesla’s shares, which at its present inventory worth could be value about $200 billion. Which means his weekend tweets are a pledge to promote roughly $20 billion value of Tesla’s shares.

The potential sale might roil Tesla’s inventory at a time when many analysts say it’s already overvalued. The corporate’s market worth lately crossed $1 trillion, making it solely certainly one of 5 U.S. publicly traded corporations to be value that a lot.

Nonetheless, James Cox, a professor at Duke College regulation faculty and an knowledgeable in securities legal guidelines, mentioned it is likely to be exhausting for Musk to return on his Twitter pledge.

“It’s a no-win state of affairs,” Cox mentioned. “Within the securities regulation, the issue is that this might be seen as a misrepresentation that was meant to mislead if one other shareholder bought on Musk’s tweet.”

However Cox mentioned it could be a tough lawsuit to win, as a result of CEOs are allowed to make statements and alter their minds, so long as they meant what they mentioned after they mentioned it.

It will not be the primary time that Musk has gotten into bother over his tweets. In late 2018, he and Tesla settled a lawsuit by the Securities and Trade Fee, with out admitting guilt, for tweeting a few potential sale of Tesla that by no means occurred. Musk was additionally sued for defamation in 2018 after calling a diver who had helped rescue kids caught in a collapse Thailand a “pedo man” on Twitter. Musk gained the go well with.

Daniel Ives, a inventory analyst at Wedbush Securities who follows Tesla, referred to as Musk’s newest Twitter pledge “weird” however mentioned he thought that given Tesla’s prospects and the investor enthusiasm for the corporate, the inventory, which is up greater than 60% this yr, would hold climbing, even with Musk cashing out a portion of his holdings.

“Musk was prone to promote a few of his Tesla inventory earlier than yr finish, however nobody ever imagined there could be a Twitter ballot translating into a ten% sale of his possession,” Ives mentioned. “This weekend’s Twitter ballot was a wierd one even for Elon.”