(MONEY Magazine) – After your funds came crashing down like kamikazes in the third quarter, you probably wanted to bail out of the infernal things. But what about all the expert advice you've heard, ad nauseam, to buy and hold?

It's true that selling a fund is often a bad idea. But by dumping a losing fund this year, you may be able to offset gains you've realized elsewhere in your portfolio, cutting your taxes overall. Instead of begrudgingly watching Uncle Sam bail out Russia, why not get him to subsidize your losses too?

And there's a second way to save on taxes: Even money-losing funds can slam investors with year-end distributions of capital gains. You can usually avoid having this insult added to your injury by selling such funds before Christmas time.

It can even make sense to sell a losing fund that you think will turn out to be a good long-term bet. That's because you can buy it back--and still preserve the tax break--as long as you wait at least 31 days after you sold. And this year, with luck, you may be able to buy it back at a lower price. For the first time since 1994, investors are sitting on big losses. And many of them are likely to bail between now and Dec. 31, locking in those losses to cut their taxes. That could send fund prices even lower--for no fundamental reason. In 1994, when municipal bond funds lost an average of 6%, they hit bottom in November; they rebounded smartly early in 1995. By selling now, you can dodge a similar dip--and the taxable payouts that many funds, like those that lost big on small stocks, precious metals and emerging markets, will make in December.

The beauty of this step is that you can capture a valuable tax break without disrupting your long-term investment plans. For example, I'm advising my wife to sell one of our favorite foreign funds--which has lost 18% this year--before it makes its year-end distributions. Then, in January, at least 31 days after she sells it, she'll buy it back. That way we can knock maybe $700 off our taxes this year--and she can quickly restore her position in foreign stocks, where we want much of our money to stay for the long run.

Conversely, you could sell a fund that was already a laggard before this year. You can upgrade to one with a better record and lower expenses and pick up a tax break to boot.

But finding out if a fund investment is now worth less than you put into it can be tough. Having a loss in 1998 is not enough; you must tot up how much money you put in when you first bought the fund, how much you added later and any distributions of income or capital gains that you reinvested in more fund shares.

Many fund companies and discount brokers will charge a fee to calculate your total cost, or "tax basis"; some investors tell me their funds or brokers are clueless in figuring tax basis. So you may need to comb through all your old account statements to find the tax basis yourself. Add up the dollar value of all your cash purchases and all your reinvested distributions; then subtract your fund's total value today. If the answer is a positive number, you can show a loss for tax purposes once you sell. Warning: If you've been "dollar-cost averaging" through an automatic investment plan, be sure to cancel that option, or the IRS may disallow a portion of your tax loss. And be sure you lock in your losses before late December; don't buy a new fund until after New Year's Day.

--Jason Zweig