When you sell stock acquired with an incentive stock option, the tax results depend on:
If you held the stock for a year or less, or if you sold the stock two years or less after the option was granted, the difference between the fair market value of the stock at the time you exercised the option and the option price is wage income. Your employer should have included that difference on your W-2, up to the amount of gain you had on the sale.
To avoid being taxed twice on that income, here's what to do. When you enter the stock sale in the Capital Gains and Losses Interview or on the Capital Gains and Losses Worksheet, we'll ask for your "cost," or basis in the stock. Be sure to include in the "cost" any compensation your employer reported on your W-2 related to the sale.
For more information, see IRS Publication 525.