It extracts both the crafting bonus (First crafting button where you just shove an item inside and tap forge) and the crafted bonus (Second button).
The item gets destroyed in the process and you're given a new item (Extraction orb) which you can then move onto any item you placed into the extraction slot to apply the orb's effects onto the item inside.
For example extracting a ring with 15% crafting bonus and 5% burning damage will give you an orb that gives both the 15% crafting bonus and the 5% burning damage.
You can only use orbs acquired from extracting weapons on other weapons, and there is a limit to the item's level that you can apply the orbs onto aswell