Earlier in November, Tesla stock hit its new all-time high. Then came a bombshell from Tesla CEO Elon Musk that he intends to sell 10 percent of his holdings in the company. A lot of speculation and conspiracy theories are floating around about why Musk is selling Tesla shares. Here are the likely reasons why Musk is selling the shares.
Musk manages to remain in the news most of the time. This week, he created controversy with his remarks on Bernie Sanders. The senator demanded that billionaires pay their fair share of taxes. Later, Musk got into a spar with Michael Burry after he questioned why Musk sold Tesla shares.
Why is Musk selling Tesla stock?
Musk held a Twitter poll and asked respondents whether he should Tesla shares amid accusations that billionaires like him avoid taxes through unrealized gains on investments. All of the top billionaires have most of their wealth parked in stocks. Since they rarely sell these stocks, the taxes that they pay are only a tiny fraction of their net worth.
Now, one would argue that Musk is selling Tesla shares because Twitter followers want him to do so. But, as a smart businessman, Musk wouldn’t base the decision to sell billions of dollars of Tesla shares on a Twitter poll.
Musk is selling shares to meet the tax obligations on options.
Musk doesn't get any fixed salary or bonuses from Tesla and all of his compensation is in the form of stock options. He has received plenty of stock options from Tesla since the company has achieved key milestones on profitability and market cap under his leadership.
Musk has 23 million stock options that would expire in August. The strike price on the shares is almost negligible so most of the money from the exercise of these options would be taxed as his regular income. Musk could face a tax rate of 54 percent and in absolute terms, his tax bill would be around $10 billion if he were to exercise all of the options.
Tesla’s regulatory filings announcing his stock sale state that they're related to Musk’s tax withholding transactions. Musk is a cash-poor billionaire and often borrows against Tesla shares. In the past, he has sold Tesla shares to pay taxes.
Along with selling the newly exercised shares, Musk has also been selling his existing shares. If the objective of selling shares is to pay taxes for exercising options, selling existing shares might not be a prudent strategy and would lead to a higher tax outflow.
Is Musk trying to sell shares before higher capital gains tax rates kick in?
President Biden has proposed increasing capital gains taxes. One theory behind Musk selling shares is that he wants to dodge the expected increase in capital gains taxes by selling shares now.
Musk thinks that Tesla stock is overvalued.
Musk has offered to sell shares at a time when the company’s market cap is near its all-time high. Many people, including Michael Burry, think that Musk is simply selling shares since he intends to profit from the sharp rise in Tesla stock over the last month. There could be merit in the speculation.
Some people think that Musk is selling shares to pay for charity after he recently talked about selling Tesla shares to help end world hunger. However, that might not be the case since he would have simply donated the shares, as most billionaires like Warren Buffett do.
Finally, Musk started selling Tesla shares around the Rivian IPO. Musk selling shares led to a fall in Tesla as well as other EV stocks. Could Musk be trying to pull down the IPO of a competitor, whose valuations he has mocked on more than one occasion?
We might not figure out the real reason behind Musk selling billions of dollars of Tesla shares. However, in all likelihood, he's trying to hit many birds with one stone.
Will Musk sell more Tesla shares?
Musk's share sale is expected to continue and he sold more shares on Nov. 15. Musk would need to sell many more Tesla shares if he intends to divest his 10 percent stake in Tesla and abide by the results of the Twitter poll. However, Tesla stock seems to be shrugging off the pessimism from Musk’s stock sale and was trading higher on Nov. 16.