I think the dividends accrue tax free. However, when you sell your bond (or bond fund), it appears to be a fully taxable event?
"While the interest income is usually tax-exempt for municipal bonds, capital gains realized from selling a bond are subject to federal and state taxes. The short-term or long-term capital gain, or loss, on a bond sale, is the difference between the selling price of the bond and the original purchase price of the bond."
https://www.investopedia.com/ask/answers/060215/how-are-munic[product key removed].asp
how-are-munic[product key removed].asp
