The Big Tax Windfall from the Facebook IPO

Facebook insiders aren’t the only ones who will get big paydays from its historic initial public offering, which prices late Thursday and starts trading Friday.

Uncle Sam and Governor Jerry will have their greedy hands out, demanding their cut.

By the time it’s done, it will be the largest technology IPO ever, with an estimated range of $16-$18 billion.

The Wall Street Journal reported Thursday that a very high 57% of the offering’s proceeds will go to existing holders. (The rest will go to the company to fund its growth.) Assuming the IPO sells at the higher end, that means employees and early investors will sell $10 billion worth of stock now.

After a six-month lockup period, ending in November, insiders can sell most of their stock.

I don’t know how much all these people paid for their shares, but their profits will be subject to federal capital gains taxes and California state levies. Facebook has said its employees’ tax obligations will total $4.4 billion.

Federal capital gains taxes may take $1.5 billion of that, but California will be the biggest winner. The state estimates it may get $2 billion from the offering and maybe another billion from follow-on stock sales over the next few years.

Co-founder Mark Zuckerberg may pay a cool $1 billion in taxes on his profits from the sale.

Facebook co-founder Mark Zuckerberg speaks at a 2008 conference. Photo: Flickr/jdlasica

The revenues are much needed by both governments, but they’re not even walking-around money for Washington, whose deficit is in the ten-figure range.

California’s Gov. Jerry Brown said this week the state is $16 billion in the hole, and draconian budget cuts and tax increases are necessary.

The tax revenues from Facebook may keep teachers and fire fighters employed for a year or so, but this is a once-in-a-lifetime deal. The state can’t count on similar windfalls to cover its huge deficit, the result of judicial mandates, voter initiatives that limit taxation, and most of all an imperious, profligate Democratic legislature that can’t say no to its powerful constituents.

The timing of the offering is an accountant’s dream. By going public now, the company locks in a 15% capital gains rate for the IPO and for when the lockup period ends. For the vast majority of holders, that would be November 15th, after the presidential election and before the end of the tax year.

If Congress doesn’t act, the Bush tax cuts will expire, driving capital gains rates back up to 20%. That’s a big difference for people who stand to make hundreds of millions in dollars from stock sales. I wouldn’t be surprised if it was a big factor in the timing of this IPO.

One person who won’t care either way: co-founder Eduardo Saverin, now a playboy in Singapore. (If that isn’t an oxymoron, what is?)

Bloomberg estimates he will save $67 million in taxes by renouncing his US citizenship months before the offering. He could be barred from even visiting the US.

I don’t know about you, but I wouldn’t make that trade—and certainly not for Singapore.

 

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