Per IRS Publication 525 Taxable and Nontaxable Income, on page 30:
Court awards and damages. To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.
Don’t include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).
If you received a Form 1099-MISC Miscellaneous Income from the payer of this income with an amount reported in Box 3:
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