I won a lawsuit. How is the compensation taxed?
Compensatory damages for physical injury or physical sickness are tax fee. Damages for nonphysical injuries (discrimination, back pay, or injury to reputation) are taxable as income (except in some cases for emotional distress). Likewise, damages for breach of contract, lost profits, or interference with business operations are also taxable. Additionally, punitive taxes are taxable, regardless of the type of suit.