Bargain element
Also: bargain element, option spread, spread at exercise
The difference between the fair market value of shares at exercise and the strike price paid. For NSOs this is ordinary wage income; for ISOs it is an AMT preference item.
The bargain element is the per-share gain the employee captures when exercising stock options, equal to FMV at exercise minus strike, multiplied by the number of shares. For NSOs the bargain element is reported as wages on the W-2 in the year of exercise and is subject to federal, state, Social Security, and Medicare withholding. For ISOs the bargain element is a preference item on Form 6251 that flows into the AMT calculation, but it is not on the W-2.
Example: 10,000 options at a $3 strike exercised when the FMV is $28 produces a $250,000 bargain element. On an NSO, the employer withholds 22% federal supplemental on $250,000, or $55,000, plus state and payroll tax. On an ISO, the same $250,000 is reported on Form 3921 and may generate AMT of roughly $65,000 depending on other income.
Common mistake: reporting the bargain element twice. It is already in W-2 wages for NSOs, so the sale of those shares uses a cost basis of strike plus bargain element. Double-counting it on Form 8949 overstates gain.
The bargain element matters at exercise planning, AMT modeling, and basis tracking at later sale.