Facebook founder Mark Zuckerberg owns 414 million shares of the company he created, plus 120 million more options. When the company goes public this year, he plans to exercise those options, worth billions, increasing his ownership, but also leaving him with a ten-figure tax bill that could total up to $2 billion, dwarfing the likes of Mitt Romney, Warren Buffett, and Buffett's secretary. But since Zuckerberg is leaving most of his shares alone, the billions he'll pay the government really aren't too outrageous. Believe it or not, he'll live.
The type of options Zuckerberg holds are taxable as ordinary income when they're exercised, even if the shareholder hangs onto the shares and doesn't sell them. 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.
Facebook said in its IPO filing that it values its shares at $29.73. At that price, Zuckerberg's options windfall would be worth $3.6 billion.
Zuckerberg will sell some shares to cover the massive tax bill, but as explained in a New York Times op-ed today, Zuckerberg doesn't have to pay any taxes on the stock he's not selling. David Miller writes, "If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death."
As Felix Salmon puts it, "If you've been getting a billion dollars wealthier every year for 27 years, a one-off payment of $2 billion doesn't seem particularly excessive, in tax terms — especially if all your other tax bills, before and since, are relatively minuscule." Facebook receives a deduction because of Zuckerberg's bill, and will receive a huge refund in 2013, when Zuckerberg's annual salary will be just $1.