This would be considered a capital loss.
IRS Pub 551, page 10, list the methods for determining the basis for inherited property. One method is the FMV of the property at the date of the individual's death. This would be your basis in the bonds. If the total liquidating distributions you received are less than the basis of your bonds, you may have a capital loss.
A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.
If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. The yearly limit on the amount of the capital loss an individual can deduct is $3,000 ($1,500 if you are married and file a separate return). If either your net loss is more than the yearly limit or your taxable income is less than zero, the loss can be carried over.
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