The concept of tracking the status of categories, tags, and topics and how they interact is complicated. I think the individual topic tracking status takes precedence over the others, but the other two depend on another user preference.
So it is possible that the user has read some topics even though the category/tag is muted.
Maybe you can show the user which categories and tags they have muted. The links to those topic lists should show them the topics because they are looking at the muted category directly.