Sorry for bumping this thread.
Can confirm, various users in my forum got confused about muting a category with sub-categories in it. They wondered why it made the category appear twice on the categories page: once dimmed in the primary view, and once hidden away in the collapsible section. It wasn’t obvious to them that they had to also mute the sub-categories in order to hide it completely.
Another potential way to implement this would be asking users whether they would like to mute sub-categories after they chose to mute a top-level category. It doesn’t have to be done automatically, but users need to be made aware of the fact that muting a top-level category may not mute all topics within it.