- Elon Musk has just exercised another 1.6 million stock options
- Elon Musk has just sold $1.02 in Tesla Stock
- The two are legs of the same action – the stock is sold to pay the tax on the exercise of the Tesla options
Elon Musk, famously, gets paid in options on Tesla (NASDAQ: TSLA) stock. These are what has made him, by most calculations, the on and off richest man in the world – Jeff Bezos being the other end of the see saw. The thing about stock options being that you only actually get the money when you exercise them. But when you exercise stock options then that’s when the tax bill is due. This simple set up explains both why Musk is about to pay the largest individual tax bill ever and also has been selling Tesla stock these past couple of months.
We’ve the news today that Elon Musk has exercised options to buy another 1.6 million TSLA shares. We’ve also the news that Musk has sold $1.02 billion in Tesla stock. As above, these are two legs of the same action. Do note that the option exercise is worth more than the sale.
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This doesn’t mean that Musk is selling out of Tesla, he’s picking up more stock than he’s selling. The options exercises add to his net position in TSLA stock that is. Before, he had stock plus options, now he’s fewer options, more stock and a tax bill. His difficulty is well, how do you pay an $11 billion tax bill?
For that’s what Musk’s tax bill is for this calendar year (the American tax system works on the calendar year). As he’s said, it will likely be $11 billion. Well, the only way to raise that sort of wind – even as a billionaire – is to sell some stock.
There’s an amusement here for of course there is. A bit back Time declared Musk to be their “person of the year”. At which point Senator Elizabeth Warren insisted that now was the time to change the tax system so that person of the year paid some darn tax. Everyone who grasped reality knew that Musk was going to exercise options this year and thereby have a massive tax bill.
Just because this is how it works. Options are granted at the market price on the day of their award (they don’t have to be but corporate tax rules mean they are, this is what Steve Jobs got wrong at Apple once). They’re only worth money to the recipient if that stock price rises by the time of that exercise date. Then, to get the money the option holder has to actually buy the stock – at that old price. The IRS then wants tax on the difference between that old, issuance, price and the current market price. Which, if the options grant has been successful can be a lot of money.
That’s where the $11 billion bill comes from. It’s then entirely normal – just usual practice – then when options mature the holder sells some to all of that maturing stock. Some if they only want to pay the tax bill, all if they want to wholly cash in. If they only sell some then they need to sell enough not only for the tax bill but also to finance the purchase of the stock at that issuance price.
This is just the way it works. There is that amusement about the Senator who writes tax law not knowing this. But for us as traders in the market the importance is that Musk just isn’t doing anything unusual with Tesla stock. Options mature, you sell some of that stock to pay the tax bill. That’s just the way it’s done.