The accrued market discount on US Treasuries is considered interest income for federal income tax purposes. However, the treatment of this income for state income tax purposes varies by state.
Accrued market discount from a US Treasury obligation is not deductible on your state return because the effective paid interest there was coming from a private party, not the US treasury. If you buy the bond from the government, you can subtract the interest. If you buy the bond from a 3rd party, the interest is not deductible.
