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What is a Bargain Element?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 September 2016
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    Conjecture Corporation
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Bargain elements are understood to involve the difference between the stock option strike price and the market price of the corresponding underlying stock. The amount of this difference between the strike price and the market price is multiplied by the number of shares of the stock options that are actually purchased.

One important aspect of the bargain element to keep in mind is that this type of stock option is not treated as capital gains. Instead, a bargain element will be classified as income received from the employer who granted the stock option. This is an important distinction, as it will impact how taxes on the bargain element are assessed. Taking the matter of taxability one step further, the exact process for taxation will vary, depending on whether the bargain element is classified as an incentive stock option or a non-qualified stock option.

Part of the allure of the bargain element is directly related to treating the generated revenue as income rather than capital gains. This helps to simplify the tax process involved in accounting for the revenue, as well as making the paperwork and the documentation easier for the employer. Thus, a bargain element is desirable for both the employer and the recipient of the stock option.

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Revenue from a bargain element can be treated as extra income, and diverted into a savings account upon issue, or even routed into a retirement plan if the employer offers this type of option. Often created with the use of stock options that are considered to be stable and relatively low risk, the amount of revenue that is usually generated by bargain elements is not usually huge, but the return does tend to be somewhat consistent in nature. This fact can help to make the bargain element a workable asset for people who are interested in preparing for the future, but do not have a great deal of extra income to invest in the effort.

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