Your reasoning does not make sense. My Treasury Notes purchased at discount through my broker (Schwab) and held to maturity reflects such cap gains on 1099-B as either long or short gains. Irrespective of long or short, Turbo Tax re-characterizes such gains as simple interest for federal taxation purposes, presumably not by fiat but by IRS regulation. The reason is simple: The IRS does not want to render favorable cap gains tax treatment for treasury notes or bonds held to maturity. If the feds claim cap gains are interest then they are interest and cannot be taxed at the state level (any state)
