The interest received from the bonds are subject to federal and state (where applicable) income tax.
As per current laws, any earned interest exceeding $10 in an Individual, or Business, LLC account year will be reported to the IRS . At the beginning of each year, 1099-INT tax forms can be found by navigating to your Settings > Document downloads > Offering > Tax form.
Bond interest is taxed as interest income, not as capital gains. Capital gains tax rates apply only to assets that appreciate in value when sold, like stock or cryptocurrency.