Q1: It is not exempt, unless NJ decides to exempt it under their state income tax laws. As your resident state, NJ has the right to tax all of your income regardless of where it comes from.
Q2: That is how NJ treats this income. They are not allowing you to claim a loss this year, which could be because of your overall income. If this is the case, it is carried forward to the next year that you can claim it. It is not lost, but it is suspended.
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