There are two types of categories in the knowledge base: parent categories and subcategories. Parent categories cannot have knowledge base articles attached to them, while subcategories can. The image below shows an example of a parent category.
Since the example above only has one parent category listed, a subcategory must be added before any articles can be created. When adding a category simply select the parent category in the window to ensure that this category gets created as a subcategory.
Now that a subcategory has been added, this can now be selected when assigning articles to a knowledge base category. So using the example below, I can now select HP Chromebooks from the category list of new or existing articles.