What's the word to describe an imaginary situation that forms the basis of an argument?

It might be called assumption:

something taken for granted; a supposition:
a correct assumption.

or premise

a proposition antecedently supposed or proved as a basis of argument or inference;

or presupposition:

presuppose: to require as an antecedent in logic or fact

Confabulate

From Merriam Webster:

Confabulate is a fabulous word for making fantastic fabrications. Given the similarities in spelling and sound, you might guess that "confabulate" and "fabulous" come from the same root, and they do - the Latin fabula, which means "conversation, story."

From vocabulary.com:

If you're chatting away for hours to your old college friend who you haven't seen in years, that's a confabulation — a personal, often rambling and generally wide-ranging conversation. A second, slightly sinister and less common meaning for confabulation is a false memory that someone creates to fill out gaps where real experience has been too traumatic to recall. As with the more common and happier meaning, both types of confabulation generally imply a good deal of creative, free-wheeling association.

Usage: White House attempts to write the story off as a confabulation were undermined, however, by expressions of alarm on Capitol Hill.

In Grammar, this is an IF-clause used in a condition contrary to fact: There are two basic cases:

1) - If you had lots of money, you would be rich. [simple past + conditional]

- If you were sane, you would not do that. [please not: were in the first or third person singular is called "subjunctive" here in English]

2) - If you'd had [had had] more luck, you'd have been [would have been] rich [past perfect + past conditional]

In Logic, these examples are called: Hypothesis Contrary to Fact, counterfactual fallacy, speculative fallacy, "what if" fallacy. Please see the link. fallacy

These fallacies can be expressed as a present or past conditional:

- If you go, you will see him. [but you aren't going, so you won't] - If you had gone, you would have seen him [but you didn't go so you didn't see him] [please note, other tense configurations are possible, and I have given the most general explanation.]

At the bottom of the Wikipedia page, there is further consideration of these propositions (utterances or statements).

Contrary-to-Fact