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Critter-3 · ‎January 19, 2023

Good question ... however I have not seen any guidance either way on this matter from the IRS ... it is not taxable to CA is all I know for sure.

In the fed section the 1099-misc is entered as income since a form was produced it must be reported :

Follow these directions to post 1099-Misc, box 3 income not subject to self-employment taxes.

Down the left side of the screen, click Federal.
In the center of the screen, click Income & expenses.
On the screen Your income and expenses, scroll all the way down to the last section, Less Common Income.
Click the Start or Update button for the last topic, Miscellaneous Income, 1099-A, 1099-C.
On the next screen, Let's Work on Any Miscellaneous Income, scroll down and click the Start or Update button for the last topic, Other reportable income.
The next screen asks, Did you receive any other taxable income. Click Yes.
On the next screen, Other Taxable Income, enter a description and the amount. Click Continue.
On the next screen click Done.

The income will be reported on Schedule 1 line 8 with the description that you entered.

In the CA interview look for this screen ...