Mark Zuckerberg, CEO of Facebook Inc (NASDAQ:FB) has an estimated tax bill of approximately $1.1 billion for 2012 based on its current wealth on paper valued at around $13 billion according to report from CNN Money.
Stacey Cowley of CNN Money reported that Zuckerberg’s decision in May to increase its interest in the social network giant resulted to the billion-dollar tax bill. During the initial public offering of the Facebook Inc (NASDAQ:FB), Zuckerberg exercised his stock option acquired 60 million shares at a “strike price” of $0.06 per share.
Although Zuckerberg did sell the shares he acquired, the Internal Revenue Service (IRS) considers it as an ordinary income during the time when he exercised his stock option. The underlying principle behind the stock option is the fact that it is a form of compensation similar to a regular salary.
CNN Money estimated that Zuckerberg earned almost $2.3 billion last year from his stock options alone. Based on the 2012 federal tax rate at 35% and California tax rate at 13.3%, Zuckerberg’s total tax rate is 48.3 %, before deductions and other income he received in 2012.
For Zuckerberg, that means reporting income last year of nearly $2.3 billion from his stock options alone. Add together the top 2012 federal tax rate of 35% and the top California rate of 13.3% — the highest in the nation — and you get a total tax rate of 48.3%.
Only the IRS and the California Tax Board knew the actual income reported by Zuckerberg in his tax return, but according to the certified public accountants consulted by CNN Money who computed the figures believed that Zuckerberg’s tax bill for 2012 is probably more than $1 billion.
Toby Johnston, a partner at tax firm Moss Adams LLP in Silicon Valley said, “With numbers that large, it’s usually capital gains, not ordinary income.” Last year, investors who made profits from their investments paid a lower tax rate in the previous tax year compared in 2012. The highest federal capital gains rate in the previous tax year was 15% and it is expected to increase to $23.8 percent this year.
Every year, the IRS releases a list of 400 U.S. tax filers with the largest reported incomes. In 2009, the average income of top earners was $202 million and their federal income tax bill was $41 million.
During the Facebook IPO, Zuckerberg sold 30.2 million shares for a total price of $1.135 billion. In a regulatory filing, he stated that he would use a substantial amount of the proceeds to pay for taxes on his stock option purchase.