It’s entertaining to imagine the conversations that went on ahead of Microsoft CEO Satya Nadella’s decision to dump half his stake in the company a few weeks before Washington State’s new capital gains tax kicks in.
Let’s be clear: We don’t have any real inside dope here. The lives of the rich and famous aren’t really what I do. But I know some folks in the wealth management business, and your correspondent is a veteran of the managing-awkward-news racket, so I can offer some informed insight. You should care about this because it’s a very large, very public version of the smaller, mostly private decisions going on around the state among the 7,000 or so wealthy people likely to pay this new tax.
First off, there was probably a conversation initiated by a member of the team responsible for tending Nadella’s giant pile of money. This person — let’s call her Jane the Tax Planner — said something like this to Nadella, or more likely to the gatekeeper in charge of the team: “Remember that plan to gradually sell off Satya’s Microsoft stock over the next few years and diversify the portfolio? Well, that’s fixing to cost him about $10 million in Washington capital gains tax.”
To which the gatekeeper, or perhaps Nadella himself, said something to the effect of: “I’m just gonna nope1 that.”
Let’s pause for a little cocktail-napkin math. We know about this stock sale because Microsoft had to report it to the Securities and Exchange Commission. That filing shows that he sold 840,000 shares for more than $285 million. What we don’t know is how much “basis” he had in those shares — what they were worth when he bought them or acquired them as part of his compensation. So we’re just going to make a conservative, low-case guess.
Over the last five years, Microsoft shares have steadily increased in value from about $60 per share to the roughly $340 he sold at. If we assign the shares he sold an arbitrary basis of about $150 a share, then roughly half the money he made from the sale is capital gain, taxable in Washington state as of Jan. 1 at 7 percent. Works out to about $10 million.
Clearly, Nadella decided that he had better uses for that money than sending it to Olympia to pay for child care subsidies and the working families tax credit. Maybe he’s got a promising side project he wants to invest in. Maybe he’s got a line on a remote tropical island. He’s a noted cricket enthusiast, so perhaps he’s going to do a Steve Ballmer and buy his hometown Sunrisers Hyderabad, currently valued at about $57 million.
Now we get to what must have been a somewhat delicate conversation at the highest levels of Microsoft’s enormous PR bureaucracy. Generally, a CEO dumping half his stake in the company all at once isn’t considered a good look. Imagine this exchange between PR executives A and B.
Executive A: “This is a bad look, the boss dumping half his stock. The markets might not like it.”
Executive B: “Nah. It’ll make him look like a ruthless global capitalist taking advantage of a one-time opportunity to avoid giving money to the government; the markets love that. Besides, you going to tell him he should cough up $10 million to avoid a kinda-bad news cycle the week after Thanksgiving?”
In the end, the company released a bland statement saying he had sold for “personal financial planning and diversification reasons.” The markets kinda shrugged.
Which gets us to the broader implications of this move for the capital gains tax. Jane the Tax Planner gave her client the same advice that her many colleagues are giving wealthy people around the state: If you don’t want to take a 7 percent haircut, then it might be time to sell.
Nadella’s decision made a loud noise because he had to tell the SEC. Most of these transactions will happen quietly. Privately or closely-held companies will change hands before the end of the year, perhaps a few years earlier than their owners had planned. Non-CEO-sized chunks of Microsoft and Amazon stock will get discreetly transmuted into houses on Maui, fine art, vintage sports cars, or just stock in other companies.
While a handful of progressive rich folks will embrace paying the tax as a civic duty, or even as atonement for many years of benefit under a tax system that falls lightly on them and heavily on the poor, most will make a clear-eyed decision with an eye on the bottom line.
The state figures the tax will bring in about $445 million per year from about 7,000 people. Don’t be surprised if that number’s a little short in 2023.
- In this maybe-alternative reality, Nadella’s children have an enthusiasm for the party game “Exploding Kittens,” which prominently features the “Nope” card, something we all wish existed in real life.