This is true for a business loan. Not on a personal loan, however.
Are you sure about this? I don’t think it can be correct. Grants of stock are taxable as income at market value as soon as they vest, regardless of whether you sell the stock. If options were not treated in a similar way, there would be an obvious loophole to grant options struck at $1 rather than stock.
ETA: I think I may have misread what you wrote. You said they are taxable (presumably as income) if granted in-the-money. I’m still puzzled about the treatment of out-of-the-money options. The way you have described it, you essentially get the time value free of tax.
Yes, as far as I know (not a tax expert) the problem was exactly that - stock options he received as part of his job/position are considered income - at least, the difference between what he paid to buy them and fair market value. And it’s income when the stock option is exercised and the stock becomes his, not on some future sale of those shares. (unlike the typical billionaire we’ve discussed whose owned stock value has grown)
This was the problem - he had to sell a significant chunk to pay that billions in income tax. The other option was to forget about getting tens of billions in income. I believe it was Paul McCartney years ago who said about the Beatles “We have dozens of accountants to tell us that the more taxes we pay, the more money we made.” Sometimes you can’t get out of paying taxes. Musk, being super-rich, made a point of not playing complicated games to evade much of these taxes.
Yes the rule was if you grant an option to buy at $100 and the stock price is at or above $100, then the grant of the option is not taxable. If you later pay $100 to exercise the option to get stock worth $150, there is still no tax due. Later if you sell the stock you owe a capital gains tax on the difference between the sale price and $100 (not the $150 you purchased it at with the option) They might have changed this rule.
The article that md-2000 cites says Forbes recently estimated that Musk owes federal income tax of $8.3 billion based on his stock sales this year. My reading of the article indicates that Musk chose to sell the stock and pay the tax because he was concerned that tax rates on billionaires would increase next year and include taxation of unrealized gains. So I think the rule I gave above is still in effect. No tax on executive stock options until the stock is sold unless they are granted in the money, in which case the amount by which the option is in the money is taxable at the time of grant.
Interesting,. What I read at the time implied he had no choice, it was unavoidable income tax. That he did in fact decide to pay taxes he easily could have avoided, and more tax than anyone else, suggests that at a certain point, taxes aren’t a big deal for some. What’s $10B here or there, if you have several hundred billion?
Another interesting side note to this - there’s a case the Supreme Court is going to hear a case about whether the govrnment can tax unrealized overseas gains, and what that really is?
https://www.reuters.com/world/us/us-supreme-court-ponders-meaning-income-tax-dispute-2023-12-05/
CNN says this about Musk:
In Musk’s case, he receives no salary from Tesla, only very valuable stock options, as a form of compensation. And under US tax code he doesn’t have to pay taxes on those options until he exercises them to buy shares of stock at a fraction of their current value.
Or this:
He is required to pay the tax in order to receive compensation of more than $23 billion, paid in the form of stock options that would otherwise expire in August.
All imply that stock options (gains) are taxable when exercised.
(bolding mine)
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you fail to mention that bezos still needs to pay back the loan … where is the (after tax) money for paying it back coming?
how is your example different from a Joe Doe taking out a mortgage/loan??? (house = collateral, you still owe and use it, and the money from the mortgage is tax-free also …)
am I missing something?
too late to edit:
(house = collateral, you still own and use it, and the money from the mortgage is tax-free also …)
Yes.
The thing is, a guy with a billion dollars does not need a billion to live. You can live quite nicely on a few million a year. So each year, you take out a loan on a few more shares, use some of it to pay outstanding interest; no need to pay down principal, as long as the share price of the pledged shares exceeds the loan amount. Yes, you are slowly accumulating more debt, but presumably - if you manage your business right - the share value keeps growing, adding to your capacity to borrow more.
The last two decades, too, the 1% benefited from loan rates of 1% or less. This process becomes problematic when interest rates start to approach the 10% range; more and more of your borrowing capacity goes to paying interest of past loans. Fortunately, the 1% is probably paying below prime rate on their loans.
The only problem is if it all comes crashing down while you are alive, you have to sell and pay taxes (but capital gains is half that of earned income); whereas if you die first, the accrued value is forgiven. You pay expensive accountants to keep track of all that and warn you before you go into the red. But, your heirs have an incentive to make it look like an accident, just like the Goode Olde Days.
How can this be true? Surely if the billionaire dies with billions in assets (shares) and millions in debt, the estate will still be liable for the debt?
The loan must be repaid. The capital gains is “forgiven”. There is no tax on that and the heirs’ basis is the value of the stock at death of the billionaire, not the price at which s/he acquired them.