Zuckerberg Taxes May Amount to $1.67B When He Exercises Option To Buy Stock

By Charles Ty on Feb 8, 2012 in Business, Stock Market, United States, World • No comments

With the recent filing of Mark Zuckerberg for Facebook’s IPO, a lot of talks have been put to the social networking giant’s financials. The most recent of these talks is about the amount of Zuckerberg’s taxes the moment he exercised his option to buy stocks of Facebook.

Mark Zuckerberg
Image Credit: Kimihiro Hoshino/ Getty Images

According to Facebook’s IPO prospectus filed in SEC last February 1, 2012, Zuckerberg was granted in 2005 the option to buy 120 million Facebook stocks at an exercise price of just 6 cents. These options are set to expire on 2015. The move will significantly increase his ownership stake in the company he founded eight years ago.

However, exercising this option to buy would incur Zuckerberg taxes amounting to $1.67 billion, according to Victor Fleischer, an associate professor of law at the University of Colorado.

The type of options Zuckerberg holds are taxable as ordinary income when they’re exercised. That means Zuckerberg will owe taxes on the difference between what he pays for his Facebook shares — 6 cents — and their market value the day he exercises the options.

Assuming Zuckerberg buys all 120 million shares at an exercise price of only 6 cents, he would only shell out $7.2 million but his gains would total about $4.77 billion if he chose to exercise it at a Facebook share price of $39 to $40 a share.

Zuckerberg’s tax rate will be the top U.S. marginal tax rate this year which is 35%. In addition, Zuckerberg’s home state of California will also get a big slice to that income, hitting those with incomes of $1 million or more with a 10.3% income tax.

“We expect that substantially all of the net proceeds Mr. Zuckerberg will receive upon such sale will be used to satisfy taxes that he will incur upon his exercise of an outstanding stock option to purchase 120,000,000 shares” of common stock, according to the filing.

Zuckerberg’s tax bill surprises a lot of people as it was never before seen. “I personally have never seen a bill into the billions — close, but not quite. I talked to a few buddies of mine at the Big Four accounting firms, and it’s something not many people have seen,” said Anthony Nitti, a Colorado-based CPA and partner with Withum, Smith and Brown.

Facebook had a valuation of at least $94 billion, or about $40 a share, in an auction of its shares on the private market earlier this week. Zuckerberg currently owns almost 414 million shares of Facebook.