Zuckerberg’s Tax Bill Could Be Largest Ever

Mark Zuckerberg could have a 2012 tax bill close to $2 billion following his decision to exercise $5 billion worth of Facebook stock options before its IPO. The average federal income tax for the 400 wealthiest tax filers in 2009 was $48 million, and Warrant Buffest paid less than $7 million in federal income and payroll taxes last year.

Zuckerberg’s tax bill could be the largest ever. Because spread between option and market prices usually occurs immediately upon exercise as compensation income, Zuckerberg faces 35%, adding up to $1.5 billion in federal tax and $500 million in California state tax. Zuckerberg could have received capital gain treatment for his options under Section 83 of the Internal Revenue Code. This Section provides special restricted property rules for employees who receive stock with restrictions from an employer.

Filings suggest Zuckerberg intends to exercise all his options but sell only enough shares to cover taxes. Zuckerberg’s retained shares should continue to appreciate and qualify for long term capital gain treatment when sold once Zuckerberg holds the hares for over a year.  

See Robert W. Wood, Top Tax Tips From Zuckerberg’s Facebook Bonanza, Forbes, Jan. 5, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.