Elon Musk's Massive Tesla Stock Sale Will Likely All Go Toward His Taxes

Tesla founder and CEO Elon Musk made a big to-do on Twitter about selling Tesla stock based on the advice of a crowdsourced poll. When the poll showed support for Musk selling 10 percent of his shares, he proceeded to sell $5 billion in equity.

According to Musk's tax withholding obligations, it looks like he sold the first portion of his stake to stay compliant with the IRS, and not his Twitter fans.

For the first time since 2016, Musk shed some of his Tesla (NASDAQ:TSLA) stock. He sold about $5 billion in stock shortly after retail investors caused an approximate $60 billion drop in Tesla's market capitalization.

The first part of Musk's sale came immediately after he exercised options contracts on Nov. 8. According to his SEC filing, he followed up by selling about half of his 2.1 million shares received after exercising the options contracts. In the process, he received about $1.1 billion in cash, liquidity that would allow him to pay the taxes on his newly realized gains.

According to the filings, Musk sold another 3.6 million shares of TSLA stock over the next couple of days. His average sale price was to the tune of about $1,071 per share, amounting to a total of $3.8 billion in capital. Together, the sales brought Musk's liquidity to around $5 billion, excluding tax withholdings.

Musk's regulatory filing says that he exercised options contracts solely for tax withholding purposes. This means he was reserving funds to help pay for the capital gains tax that accompanies the overall $5 billion sale of his equity.

Musk will have more options contracts expiring in Aug. 2022, so this won't be the last of his options-contract exercising.

Musk pays the top federal income tax rate of 37 percent. As his wealth is tied up in investments, he primarily pays a capital gains tax of 20 percent for long-term positions (held for more than a year) and a 3.8 percent net investment income tax (NIIT) on top of that.

The NIIT is reserved for high-income taxpayers making more than $200,000–$250,000 per year. The 3.8 percent rate impacts capital gains, dividends, and rental property income.

Because Musk has been integral to Tesla since the very beginning, his cost basis is a moot point. With about $5 billion in capital gains on his TSLA stock sale, he's set to dish out about 23.8 percent in taxes, or about $1.2 billion.

Considering Musk paid a measly $455 million in income taxes in the four years ending in 2018, that's a big tax bill. Ultra-rich entrepreneurs pay notoriously low true tax rates because their money is tied up in various investment vehicles. As people mull the potential of an unrealized gains tax on the top one percent, Musk is preparing to shell out big this tax season.