We don't make a big deal out of the tooth fairy, Santa Claus or the Easter bunny around here. Most of the children have believed or wanted to believe that these make-believe things existed until they were around 4. We never encouraged or discouraged the kids' belief. When the children asked if the tooth fairy was real, I always said that only if they wanted him to be real.
When Joe was 15 months old, he tripped with a kazoo in his mouth and knocked his two front teeth out. It was a scary experience and involved an emergency visit to the dentist, followed by a solid week of pudding and applesauce for Joe's meals. His gums were black and very tender for a long time.
While at a play date, the other mom asked about his tooth loss. After explaining what had happened, I stated that I had been really generous with his tooth fairy money. Unfortunately, her 3 year son had entered the room unexpectedly and overheard my remark. I felt terrible about my spoiling the tooth fairy for her son and apologized profusely. Later that day, I received a phone call from the mom. Her son's belief in the tooth fairy wasn't shaken. He believed that he had figured out that the "real" tooth fairy was Joe's mom! He spent over a year telling all his friends that I was the real tooth fairy. No wonder so many children liked me!