I agree that the Accrued Market Discount on U.S. Treasury Notes is taxed as interest by both the Fed and the State. In my state, Nebraska, interest on U.S. Treasury Notes are exempt from income tax for state income tax purposes. I am not treating them as capital gains. I'm not sure where you are disagreeing with my logic, but I have filed my Nebraska return using Turbotax, and the state accepted my return.
