In October, Elon Musk was challenged via Twitter to donate 2% of his wealth to help solve the global hunger crisis.
Musk famously responded that “if WFP can describe on this Twitter thread exactly how $6B will solve world hunger, I will sell Tesla stock right now and do it.”
But what exactly would such a massive donation mean, tax wise? And how does one even go about selling and donating $6 billion dollars worth of stock?
“There's two ways to do it,” says Nicole Derosa, a Senior Tax Manager at Wiss & Company. “You either sell it and then you donate it, or you donate the appreciated stock as a non-cash contribution.”
After some back and forth Twittering and a demand to see how this would all work from Musk, UN food program director David Beasley responded on Monday with a link to a 1,000-word summary.
The outlined exactly how $6.6 billion could provide meals to more than 40 million people across 43 countries facing famine, and help avert a hunger crisis that is urgent, unprecedented, AND avoidable.”
At the moment, it’s unclear how the world’s wealthiest man is going to respond now that the ball is back in his court. While Musk likely doesn’t have the ability to solve hunger with one fell swoop, “it sure as hell would help.”
In the first tax scenario, Derosa says that “if you were to actually go through and first sell the stock, he would obviously have a long-term capital gain. He would have increased taxable income as a result.”
However, he most likely wouldn’t have to pay any taxes on the increased value of the stocks he sold, as long as he followed through on the charitable donation.
“If you were to, in turn, then donate it for 2021, any cash contributions have a 100% of adjusted gross income limitation,” she adds.
“So theoretically, he can get a dollar-for-dollar kind of taxable income deduction for it, assuming he itemized deductions on Schedule A, so he could essentially offset any gain, at least federally with a contribution of such proceeds.”
So in this scenario, Musk wouldn’t be taxed for the sale, “if there’s nothing else going on with his return,” says Derosa. “Which we all know, there's probably a lot of other things going on with his return and his taxable income.”
Derosa also clarifies that, as a 501(c)(3) charity organization, the UN World Food Programme would not be on the hook for any taxes, nor would the sale affect the tax status of Tesla.
While the above scenario would clear him of federal taxes, he could still run into state taxes; Musk splits residency between California and Texas.
“Not all states allow you to have such a large charitable deduction,” says Derosa. “If he were to just donate the appreciated stock that wouldn't trigger a taxable event of gain. Essentially, it would just give him a charitable deduction.”
Ultra-wealthy donors like Jeff Bezos and Jack Dorsey donated billions last year to various charities, but a gift of this size would be, if not the largest one-time charitable donation of all time, certainly one of them.
“It’s definitely the largest that I've ever heard of,” Derosa said.
If Musk were to go through with the donation (which is still quite an if) he would, no doubt, be praised for charitable nature. He also could avoid the potential embarrassment of backing down from a social media pledge.
But he also stands to gain quite a bit beyond good press for helping to combat world hunger, as next year, he won’t be able to reduce his overall taxable income by such a large percentage.
“What people like to do toward the end of the year is offset some of their capital gains by capitalizing on the current tax charitable contribution limit of the 100 percent of adjusted gross income for 2021,” she says.
“Because that is something that has been changed just for this year and 2020. It'll revert back down again to 60 percent next year.”