When you sell shares acquired via an ISO in a disqualifying sale - which this is - compensation is created and reported and taxed.
If you sell the shares at a higher price than the "fair market value" at exercise then the compensation is the "spread" at exercise, (per share FMV - per share strike price), and that per share "fair market value" becomes your basis for reporting the sale. So the difference between your basis and the proceeds is, typically, short term capital gain. Accordingly, I think you're wrong when you say "My employer withheld tax on the amount representing the difference
between the sale price and fair market value (x the number of shares)" since you indicate the fair market value at exercise was less than the selling price.
The "spread" at exercise was reported as compensation, that compensation is taxed in your income tax return, and taxes were withheld at exercise.
The difference between the (lower) per share FMV at exercise and your (higher) per share selling price is short term capital gain, which also is taxed in your income tax return and against which no taxes were withheld.
These are two entirely different things and the taxes charged against the compensation (and taxes withheld) has nothing to do with taxes due on a capital gain. You can't somehow report that withholding a second time.
Tom Young
