Bargain element
Certified Financial Planner glossary · Certified Financial Planner
Definition
The excess of fair market value over exercise price at the time a stock option is exercised.
Bargain element in plain English
An employee exercises stock options when shares trade at 40 and the strike is 25. The $15 gap is the bargain element: fair market value over exercise price at exercise. Nonqualified options usually put that spread into ordinary W-2 income right away. Incentive stock options often route it through AMT unless a disqualifying disposition reframes the tax. When a stem asks what is taxed, value the spread at exercise, never at the original grant date.
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