The correct code is 1 (no known exception). And $0 tax would be correct if you elected to spread the tax. Once you indicate that it was covid-related, that removes the 10% early withdrawal penalty. When you elect to spread the tax over 3 years, you are electing to pay the tax over 3 years, 10K each. You have already paid back the 2020 portion of 10K, so no tax for 2020. Next year (and 2022), you will owe tax on 10K of retirement income, unless you pay it back of course. Code 2 should be used if you are under 59.5 and one of the following applies.
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you directly converted the assets to a Roth IRA;
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the distribution was a result of an IRS levy;
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the distribution was part of a series of substantially equal periodic payments; or
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the individual qualifies for a penalty tax exception that doesn’t require using codes 1, 3, or 4.
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