Investors who reinvest monthly distributions from their fixed-income funds are particularly susceptible to running afoul of the wash-sale rule since they may buy shares every month.

And if you think you'll be able to take a loss on some fund shares after a dividend distribution and reinvestment, when the share price has fallen, think again. To do so before the end of the year will certainly put you inside the dreaded 30-day window. (See also: "7 Mutual Fund Mistakes to Avoid.")

Also, if you've already reinvested your income fund's November income distribution, you won't be able to book a loss on a sale in December. That said, the loss that is disallowed is only on shares equal to the number purchased inside the 30-day window. So, if you're selling 2,000 shares to take a loss and you happened to reinvest a distribution and got 5 shares in the transaction, you'll still be able to deduct the loss on 1,995 shares.

The issue of not buying something again within 30 days of realizing a loss leads directly to my next bit of advice, and something I've told investors to do for years. Rather than automatically reinvesting, have Vanguard send your distributions to your money market fund instead.

That's right: Don't reinvest, particularly if you're doing some tax-loss selling within the 30-day window prior to a fund's distribution date. This is particularly important if you're selling only a portion of your shares in a fund to take a loss, and doing so close to a distribution date.

For instance, you've bought shares every month and now want to sell only those that are underwater. The problem is that you will still receive a distribution on your remaining shares, and if you reinvest your distribution (within 30 days of taking the loss), you'll run afoul of the aforementioned wash-sale rule.

Fund investors have a way around the wash-sale rule, of course. We can sell a fund to take a loss and buy a similar investment, which we then hold for 30 days. After that time, we can sell it and repurchase the original, preferred fund if we want. The funds can't be exactly alike, however, such as exchanging one S&P 500 index fund for another (though exchanging for an ETF might work), or selling a fund's Admiral shares and buying the Investor shares.

The IRS frowns on these shenanigans, though I'm not aware of its having been tested in tax court. But better to be safe than sorry.

One last thought. If you do want to make some allocation changes or do some rebalancing in your portfolio, take your losses in this calendar year, but wait until January 2, 2009, to take gains. That way, you can use your losses on your 2008 tax return, but you won't owe the IRS taxes on your gains until you file in 2010.

If you're looking for the inside help that gives you special advantages over other investors at Vanguard, click here to accept a risk-free trial to The Independent Adviser for Vanguard Investors. Each month, in every issue, Dan will show you all your options and tell you what Vanguard can't—and in some cases won't–tell you. You'll get independent and unbiased in-depth information on Vanguard funds, including the best funds to buy, alternates for closed funds, advance warning of funds likely to close, changes in management and much more. He's been doing it for over 17 years for his subscribers, and his track record of providing a 144% advantage is proven and irrefutable. Join risk-free today!