Who, besides you, sheds a tear for the money you've lost in the market? Sweet old Uncle Sam, that's who.

He feels so bad that he lets you write off your losses on your income tax return. At the same time, he lets you make new investments that might recover your losses if the market goes up.

For every $1,000 that went down the drain on Black Monday (or any other day), the federal government will in effect reimburse you for up to $385 this year, if you're in the 38.5 percent tax bracket. State tax writeoffs can retrieve even more.

In the 28 percent tax bracket, you get $280 back.

But you don't receive that handout automatically. First, you have to "take" your loss -- which means selling the stock, bond or mutual fund that has dropped in value. For many investors, that's the hard part.

People hate to sell an investment when it's down. To them, a loss is not really a loss as long as it's only on paper.

But that way of thinking is wrong. A paper loss is the real thing, whether you sell or not. Instead of denying it, you should be trying to turn your lemon into lemonade.

A loss can be used to shelter part or all of a capital gain from taxes. For example, if you cashed in a $5,000 gain on a mutual fund, and took a $5,000 loss on another investment, the loss would offset the gain, so you'd pay no taxes on it.

If you have no investment gains, you can use capital losses to shelter up to $3,000 a year in regular income. Losses unused this year can be carried forward to shelter income in future years.

Taking your loss doesn't mean walking away from the stock or bond market entirely. You can sell your losers to establish your tax loss and get a reimbursement from the government. Then, use the proceeds to buy back a similar investment. That's called a swap.

Result: You are in virtually the same investment position but have turned your losses into solid cash.

You cannot buy back the same stock, bond or mutual fund right away. The IRS will disallow your tax loss if you repurchase exactly the same investment within 30 days of the sale.

But you can swap for a similar investment. For example, if you have lost money in the Mutual Shares fund, you could sell it and put the proceeds into Mutual Beacon, which has similar investment goals.

(Obviously, tax-loss swapping works best with mutual funds that charge no sales commissions or exit fees. It might not pay if your new fund charged you 8.5 percent off the top.)

Whenever you tax-swap with only part of a holding, be sure to specify exactly which shares you are selling. Otherwise, the government will assume that you sold the shares that you bought first -- which could ruin your strategy. It might be only your newer shares that show a loss, while your older shares still have a gain.

Bond swaps work the same way -- and given the big losses in municipal bonds this year, many investors have been primed to play. You sell your current bonds and reinvest in others of similar quality and yield.

But a proposed law, just passed by the House of Representatives, would complicate this strategy.

When you buy a bond on the open market for less than face value (a "discount bond"), you usually have taxable income -- even on tax-free municipals -- when that bond matures or is sold. Your municipal bond interest is tax free, but your gain in principal isn't.

Investors generally have not been taxed on that gain in principal until their investment was liquidated. Now, Congress proposes to tax a portion of the gain every year on bonds bought for less than face value after Oct. 13.

If the bill is accepted by the Senate, it would not affect the size of your tax loss or the amount of income it could shelter. But it would change the tax status of the discount bonds you replaced them with, forcing you to pay taxes on them annually. So if you deal in individual bonds, you might want to swap only for bonds selling at face value or above, says Jack Crestol of Coopers & Lybrand, until you see whether the proposal passes.

Investors in municipal-bond mutual funds would owe the new tax whether they swapped or not, if their fund bought discount bonds.

"Something like this happens at the end of every year," said Bill Brennan, of Brennan Reports.

"Congress is always trying to stop people from saving taxes at the last minute.