Tesla stock has worst day in 8 months as investors digest Musk's potential $15B tax bill

Shares in the most valuable car company on Earth tanked on Monday because the richest person on the planet may have to pay some taxes.

Electric car maker Tesla's shares were down by as much as seven per cent on Monday as investors digested news that the company's controversial CEO, Elon Musk, may have to sell millions of shares in the company to pay a looming income tax bill of up to $15 billion US. 

In a bizarre Twitter poll over the weekend, Musk mused about whether or not he should sell about 10 per cent of his holdings in the electric car maker that has seen its value soar during the pandemic. Currently, Tesla is worth about $1.2 trillion US, more than the value of every other major vehicle manufacturer in the world, combined.

Musk, who owns 170 million shares in the company, said he would abide by the results of the poll either way, and more than half of his poll's respondents told him to sell.

At current prices, Musk selling 10 per cent of his Tesla stock would net him about $21 billion US. 

Stock windfall brings hefty tax bill

While Musk is no stranger to making bizarre pronouncements on Twitter, the sell-off in Tesla shares started to make a little more sense when it emerged that he could be on the hook for a hefty tax bill next year, when stock options granted to him a decade ago are set to pay off.

In 2012, Musk was awarded about 23 million stock options in Tesla, when shares in the money-losing company that sold a few thousand cars every year were going for about $5 a piece. Today, those same shares are changing hands at nearly $1,200 apiece, which means Musk stands to net up to $28 billion when they pay off — or "vest," in investment parlance — in August of next year.

While a nice payday by any reasonable metric, that stock windfall would bring with it a hefty tax bill based on laws in California, where Musk has been a resident for most of the past decade.

The highest tax bracket in California is above 50 per cent when federal and state taxes are factored in, and media reports on Monday suggest the tax bill could be between $10 and $15 billion US. On the high end, that's about four per cent of Musk's current net worth of $338 billion US, which is the most of anyone on earth.

Musk famously does not get paid much of a conventional salary, preferring to take most of his compensation in stock-based forms. Bloomberg data shows he received a base salary of $0 in 2020, down from $23,760 in 2019 and $58,380 in 2018.

Though Musk tweeted about needing to sell as much as 10 per cent of his holdings to cover his tax bill, he wouldn't actually need to sell that many shares, which is why analyst Daniel Ives of Wedbush Securities says that figure surprised some people and prompted the sell-off in Tesla shares.

Tesla shares closed at $1,222 on Friday and, at one point on Monday, were going for as low as $1,141. That's a decline of 6.6 per cent, although the shares pared some of those losses in the afternoon.

If Musk does sell a large chunk of shares, "ultimately it's a digestible number we are not overly concerned about," Ives said. 

'Rip the Band-aid off now,' analyst says 

In a quarterly filing with regulators last month, the company acknowledges that stock sales by the CEO are not only possible, but they could also have a major impact on the stock price.

"If the price of our common stock were to decline substantially, Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock to satisfy his loan obligations if he could not do so through other means," Tesla said.

"Any such sales could cause the price of our common stock to decline further."

If Musk is going to sell, Ives says, he'd prefer to see him do it fast.

"We would rather Musk rip the Band-aid off now and sell this portion of stock, rather than it lingering over the next year and feeding into any non-fundamental bear thesis on the story."

Musk also recently mused about his willingness to donate $6 billion to solve world hunger, as long as the UN World Food Programme could show him exactly how it would spend the money to do that.

In addition to pontificating over whether or not it's worth his while to feed the world's poorest people — a charitable move that would doubtless significantly bring down his tax bill — this year alone Musk has also caused the price of the doge cryptocurrency to skyrocket and then plummet again. 

He recently caused the share price of car rental company Hertz to jump and then crater by suggesting a deal for them to buy 100,000 of his company's cars may not be a sure thing.

WATCH | Musk's war of words over solving world hunger: 

Another regulatory headache?

There's also some question as to whether or not Musk has once again run afoul of securities laws with his tweeting.

In 2018, he made headlines for suggesting in a tweet that he had secured funding to take Tesla private for $420 a share, at a time when the company was worth far less than that. That sparked a run-up in the company's share price, before it fell back down again when he admitted the plan was far from certain.

The Securities And Exchange Commission launched proceedings against him for misleading investors with that tweet, and among the stipulations of that settlement are that Musk should refrain from saying things on Twitter that he should be telling regulators and investors about first.

Bloomberg Intelligence analyst Holly Froum says that Musk's Twitter poll is "likely not contractually binding, but if Musk doesn't abide by his plan, it could be considered misleading and give rise to securities fraud claims in the event of potential investor losses."