You will have to report the total amount on your tax return, and then add an offsetting adjustment to remove it from your income.
The IRS will expect to see the 1099-MISC reported on your return, just as it was sent to you.
Since the 1099-MISC reports income that is not related to your main job or self-employment, enter the information as follows in the 1099-MISC interview:
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Enter the 1099-Misc in the Other Common Income section of Income and Deductions. (Enter "1099 misc" in the Search Box and Select "Jump to 1099 misc form")
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For "Description", enter "Loss in value settlement"
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Also check that it does not involve work like your main job, that it did not involve an intent to make money, and is not a recurring payment (received in the past or expected in the future) (these questions only apply to active, not passive, income).
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The income will be reported on line 8 of Form 1040 of your return (Other income from Schedule 1, Line 9).
To enter the "expense":
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Go to Less Common Income, Miscellaneous Income and Other reportable income. Enter "Lawsuit settlement" in the Search Box and Select "Jump to lawsuit settlement" to get to this screen
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Continue to the screen "Other Taxable Income". Enter the description as "Loss in value settlement" and the amount as a negative number. Entering "-$ XXXX" here will offset the amount reported on the Form 1099-MISC. These are NOT wages.
A corresponding negative amount will be entered, and the total line 8 of Schedule 1, will be zero.
(The previous post (from @Opus17) makes a good argument, but this solution is technically correct. In a perfect world, you would be able to contact the Payer and have them issue a corrected 1099-MISC).
