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Capital gains are federally taxed whether from a muni bond fund or any other asset. However the rules can vary according to state when it comes to state tax. For wxample in Maryland (where I live) capital gains earned on the sale of Maryland munis (or even a bond fund of Maryland munis) are subtracted off to arrive at state taxable income. This is true although the gains are taxed by IRS. However in Maryland for state tax purposes you can't subtract off gains made on other (out-of-state) muni bonds.
Norm
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