WFCN – The man behind SpaceX and Tesla, Elon Musk, is renowned for his astute business tactics in addition to his ground-breaking inventions.
His tax strategy is one of the most talked-about parts of his financial savvy.
The following three salient tax benefits are discernible from Elon Musk’s personal narrative.
1. Making Use of Stock Options
Elon Musk uses stock options, which is a major component of his compensation package. Musk’s primary source of income is his stock options, which are only taxable when they are exercised, as opposed to receiving a hefty salary. This tactic has numerous advantages:
Tax Liability Deferral:
Musk delays paying taxes by delaying the exercise of his stock options. This enables his options’ value to increase potentially tax-free until he chooses to exercise them.
Reduction in Capital Gains Tax:
Musk pays capital gains tax instead of regular income tax when he eventually sells the stock he bought by exercising his options. Generally speaking, capital gains tax rates are lower than income tax rates, which leads to substantial savings.
For example, Musk exercised millions of stock options that were about to expire in 2021. He held onto the shares, postponing a large portion of the tax liability until he decided to sell them, rather than cashing them out right once. More flexibility and possible tax savings are provided by this method.
2. Gifts to Charities
Elon Musk has a reputation for being a kind person who frequently donates Tesla stock to charitable causes. Significant tax benefits are obtained from charitable contributions:
In the event that Musk chooses to donate appreciated stock rather than cash, he is able to deduct the stock’s fair market value as of the contribution date. If you donate the basis or purchase price of the stock, you may receive a bigger deduction.
Reducing Capital Gains Tax:
Giving stock as a donation also helps you avoid paying capital gains tax that would be owed if you were to sell the shares. For highly valued items, this can be especially beneficial.
Tesla shares valued at over $5 billion were donated to charity by Musk in 2021, a move that garnered national attention. This avoids capital gains tax and provides substantial tax benefits, in addition to supporting causes he believes in.
3. Lending Against Resources
Frequently, Elon Musk uses his assets as collateral for loans rather than selling stock to raise money. This tactic offers several tax benefits.
Keeping Stock Loans Out of Tax Law:
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Unlike selling stock, which would result in capital gains taxes, borrowing against stock does not cause a tax liability. Musk can obtain liquidity without having to pay taxes right away by using his stock as collateral for loans.
Maybe Cheaper Interest Rates:
The interest rates on loans backed by expensive stocks, such as Tesla stock, are frequently less than the capital gains tax rate in force. Because of this, borrowing money can sometimes be a cheap way to get cash.
Musk has funded his personal costs and a number of projects using this method. He allegedly took out multiple big loans, for instance, using his Tesla shares as collateral. This allowed him to acquire needed funds without creating a tax event and keep his ownership part in the company.
In conclusion
For those trying to make the most out of their own financial circumstances, Elon Musk’s tax tactics provide insightful lessons. Musk reduces his tax obligation while increasing his financial freedom by using stock options, charitable donations, and asset-based borrowing.
Even while not everyone can benefit from these tactics, knowing the underlying ideas can help people make better financial decisions. As usual, before putting complicated tax tactics into action, you should always get advice from a tax expert.