From Investopedia.com:
'The accrued market discount may be taxable at the federal, state and/or local level. An investor who chooses to accrue the market discount over the period during which s/he owns the bond would include the amount accrued each year as interest income.'
The Accrued Market Discount is most likely taxable at the State level. You would need to confirm that it is NOT with your State Dept. of Revenue, or perhaps a local CPA.
@fjsingel
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