TMCnet Feature

Mark Zuckerberg (News - Alert), one of the founders of Facebook and its current CEO, will become a billionaire thanks to Facebook’s (News - Alert) upcoming IPO. At the same time, the IRS and the state of California will benefit, too—to the tune of about $2 billion.

Zuckerberg is taking the tax hit because he plans to exercise billions in stock options. He currently owns 414 million shares of Facebook, but he has options to buy 120 million more shares at six cents per share. Wall Street is currently valuing Facebook shares at $40 per share, which would make Zuckerberg’s options worth nearly $5 billion. In addition to making him a billionaire, the move will significantly increase Zuckerberg’s ownership stake in his company.

The 27-year-old CEO plans to sell only enough shares to cover his tax bill during the initial IPO, which analysts say is the right move. However, his large stake in Facebook closely ties his fortune to the performance of the company, which some analysts are saying may not meet expectations.

Based on Zuckerberg’s tax bill and other expenses related to Facebook stock, the company may report a loss on its income taxes that will entitle it to a refund that may top $500 million. However, Facebook’s largest source of income is generic online advertising, which has never proven profitable for many media organizations. The Economist magazine likens those investing in Facebook today to Rupert Murdoch, who spent $580 million to buy MySpace (News - Alert) only to see the social network eclipsed by Facebook and Twitter (News - Alert).

Facebook has overtaken Google as the most popular website in America. However, Google famously heightened its advertising revenue by allowing businesses to tie their ads to search engine results. Facebook has shown no such strategies to generate innovative sources of revenue, but the company will save money on Zuckerberg’s salary. The CEO has asked the company to drop his salary to $1 next year.

For this year, however, the U.S. government and the State of California will make a nice windfall thanks to Zuckerberg’s stock options. The IRS’s top marginal tax rate is 35 percent, and California’s is 10.3 percent. Put together, analysts expect Zuckerberg’s tax bill to fall between $1.5 billion and $2 billion, generating an unprecedented sum, according to most tax experts.