When Elon Musk polled his Twitter following over the weekend about whether or not he should sell his Tesla stock, it might have seemed like the typical oddball move for the billionaire entrepreneur.
But financial professionals said Musk’s tweet was possibly driven by the desire to employ a smart, end-of-year tax strategy. And they note that investors might be wise to follow the Tesla
CEO’s lead in a certain respect, and take a hard look at their portfolios before Dec. 31.
Or, as Richard Austin, a financial adviser with the Massachusetts-based firm Integrated Partners, simply put it: “Live your life like Elon Musk” — even if you don’t have Musk-level riches.
In Musk’s tweet, he addressed the question of unrealized capital gains being “a means of tax avoidance” — something that has been discussed as part of tax-reform initiatives — and he proposed selling 10% of his Tesla stock. Of the 3.5 million followers who responded, 58% said he should indeed sell.
As financial pundits have already noted, Musk is actually in a situation where he almost has no choice but to sell: He has stock options — on nearly 23 million shares — that will expire in August 2022. And Musk has previously signaled his intention to sell a “huge block” in the fourth quarter of this year. CNBC noted that Musk’s options would generate a gain of nearly $28 billion (based on Friday’s market close) and that the tax bill on the sale could be around $15 billion.
Musk could exercise all his stock options this year. Or he could do so next year. But some financial professionals think his strategy may be to split the sale across two years as part of a tax move. Ultimately, Musk won’t likely be saving on his overall tax hit — he’s in the highest income bracket, so he’ll have to pay the government the full freight no matter what over time. But by splitting the sale between 2021 and 2022, he’ll be able to hold on to some of those billions a little longer for whatever use he might have in mind.
In other words, it’s about weighing the opportunity cost, said Harry Kirkpatrick, a financial planner with Facet Wealth, a virtual financial-planning firm. “What could he take that money and invest it in?” said Kirkpatrick.
At the same time, by not selling all at once, Musk may be avoiding dinging Tesla’s stock price as severely, financial professionals said. Typically, any large sale — or potential sale — by a company’s executive can have a negative effect on stock price. As it is, Tesla shares have already declined by more than 10% since Friday’s close.
Given this possible scenario regarding Musk’s thinking, there are key takeaways for investors to consider when it comes to their own holdings, professionals said.
First, for investors who specifically have stock options, Austin said tax implications should always be kept in mind in terms of when to exercise. Investors at lower tax brackets may unwittingly put themselves into higher ones if they exercise all at once, he explained, so the staggered approach could work to their tax advantage.
But otherwise, professionals said investors should always take a close look at their portfolios heading into the year’s end. In particular, they may want to sell stocks that have declined to offset any gains taken in the past year.
True, it’s sometimes hard to part with a long-held stock, particularly if there’s hope for a turnaround. But professionals said investors can always consider buying that stock back at a later time, keeping in mind the IRS “wash sale rule” that requires waiting a certain period.
Investors can also consider buying something else in the intervening period that speaks to a similar investment aim. “If you’re selling Intel, you can buy the semiconductor index,” said Clark Kendall, president of Kendall Capital, a Maryland-based firm.
The broader point is that owning stocks indeed comes with a host of tax questions and concerns, professionals said. And that could be what’s driving Elon Musk’s end-of-year thinking.
“Ultimately, what he’s doing is a microcosm of what all investors should be doing. They should be making tax-efficient decisions,” said Kirkpatrick.