Why can't municipal bonds be used to offset interest expense from a margin account?

Municipal bonds produce interest income that is typically exempt from federal income tax and, in many states, also exempt from state and local taxes. This tax-exempt status means that the income generated from municipal bonds is not subject to taxation, and, therefore, cannot be used to offset interest expenses incurred in a margin account. In general, tax deductions for interest expenses on margin accounts are typically available for interest on investments that generate taxable income. Since the income from municipal bonds does not contribute to taxable income, it cannot serve as a counterbalance to interest expenses associated with margin borrowing, which is taxable.

The other options provided do not accurately reflect the fundamental tax treatment of municipal bond interest in relation to margin account interest. The tax-free nature of the income from municipal bonds is the key factor preventing offsetting interest expenses.