This was fired by me from a buddy's 186 series Mini-14. I know, not an AR, but relevant because of the caliber. Anywho, this round was fired with no magazine inserted. It's Federal Classic .223, the black box stuff. The rifle extracted, and I believe ejected fine. I did not have to dig the case out of the rifle. My only guess is the case was bad/weak. The rifle seemed fine, did a few remote test fires, no problems.

Any ideas what happened?

The case was cut that cleanly?

Is it possible that it did not eject completely and the bolt closed on it?

Case split and the front half got crushed by the closing bolt. Reload? Brass may have been worn out or just defective.

I thought the bolt may have closed on the spent case, but there's no way the bolt would shear it like that, right?

This was not a reload, it was fresh off the shelf Federal.

"case head" separation

overworked/bad brass and/or bad headspace

I would at least check hadspace

When you make bazillions of something, odds are that one will come out "bad" from time to time.  It looks like that was a factory round, so that's my personal take on your situation.

I have a Winchester .308 case separate exactly like that years ago in my FAL. It was a new case with a moderate powder charge. Case ejected normally and I didn’t even notice the separated case untill policing my brass after a few more magazines. I never did figure out what happened with that case and I am convinced that I got a bad case from Winchester.

Classic case-head separation.  Seen it many times.  Uncommon for it to happen with factory ammo - more common in reloads.  

From a safety and down-range performance standpoint, it's actually a non-item.  The back half the case remains swollen while under pressure and seals off the chamber and pressure from the action (usually).  The break usually doesn't even occur while under pressure, but happens during cycling - which is to say not until the bullet is out and on its way.

The main issue is it generally causes a jam. Unusual to happen with fresh factory ammo, but I'm not surprised to see it's Federal.  The reason it can happen with reloads is the brass gets worked back and forth with every cycle, and after about 5 cycles (of actual fire), a batch will start showing these failures.