Gift certificates themselves are not taxed when given or received
A gift certificate is not income to the person who receives it, and the giver does not owe federal gift tax on it. The certificate has no tax consequence at the moment it changes hands. This is true whether the certificate is for $25 or $2,500.
The tax question arises later, when the certificate is actually used to buy something. At that point, the person using it pays sales tax on the purchase — just as they would if they had paid cash. The retailer collects and remits that sales tax to the state, not based on the certificate itself, but based on what was bought.
The only exception is if you give away so many gift certificates in a single year that the total exceeds the annual gift tax exclusion amount. That threshold is set by federal law and changes each year. For 2024, you can give up to $18,000 per person without filing a gift tax return. Amounts above that require you to file Form 709 with the IRS, though you typically do not owe tax unless you have already used up your lifetime exemption.
Key Takeaways
- Receiving a gift certificate is not taxable income to the recipient, regardless of the amount.
- Sales tax is owed only when the certificate is redeemed to purchase something, and the retailer collects it at that time.
- The giver may need to file a gift tax return if the total value of gifts to one person exceeds $18,000 in 2024, though this rarely results in actual tax owed.
- Employer-provided gift certificates may be treated as taxable compensation if they are given as a bonus or reward rather than as a true gift.
When the retailer collects sales tax on a redeemed certificate
Sales tax is calculated on the final purchase price of the items bought with the certificate. If you use a $50 gift certificate to buy a shirt that costs $45, you pay sales tax on $45, not on the certificate value. The retailer's point-of-sale system treats a gift certificate the same way it treats cash — as payment that reduces what you owe, and tax is applied to what you are actually purchasing.
The sales tax rate depends on where the purchase happens. If the retailer has a physical store in your state, they must collect tax at your state's rate. If you order online and the retailer ships to you, the rules vary by state and by retailer size, but most large retailers now collect sales tax on all orders regardless of where they ship from.
The retailer does not report the gift certificate to the IRS or to you. There is no Form 1099 or other document. The only tax document involved is the receipt you get at the register, which shows the sales tax charged.
Gift certificates from your employer are different
If your employer gives you a gift certificate as a holiday bonus, a performance reward, or any other form of compensation, it is taxable income to you. Your employer must include the value on your W-2 as wages, and income tax is withheld from your paycheck.
This is true even if your employer calls it a "gift." The IRS distinguishes between true gifts (given out of personal affection with no expectation of return) and compensation disguised as gifts. A certificate given by an employer to an employee is compensation. A certificate given by a friend or family member is a gift.
If you are unsure whether your employer's certificate counts as taxable compensation, check your W-2 for the year it was given. If the value appears in Box 1 (wages, tips, other compensation), it was treated as taxable income and tax was already withheld. You do not need to report it again on your tax return.
Unused gift certificates and expiration dates
An unused gift certificate has no tax consequence. You do not owe tax on a certificate you own but have not spent. Some states have laws that prevent retailers from letting certificates expire or charging dormancy fees, but those are consumer protection rules, not tax rules.
If a certificate expires and you never use it, you cannot deduct the loss on your tax return. The certificate was a gift, and gifts are not deductible. If you gave someone a gift certificate and they never used it, you do not get any tax benefit from that either.
If a retailer goes out of business and your certificate becomes worthless, you still cannot claim a loss. Gift certificates are not considered property with a basis for tax purposes in the way that stocks or real estate are.
Selling or transferring a gift certificate
If you sell a gift certificate to someone else — whether through a gift card resale website, to a friend, or to a business — you may owe tax on the sale. The tax depends on whether you sold it for more than you received it for, and how you received it in the first place.
If someone gave you a $50 certificate as a gift and you sell it for $40, you have a loss, which is not deductible. If you sell it for $60, you have a $10 gain. That gain is taxable income, usually treated as miscellaneous income on your tax return. You should report it on Form 1040 Schedule 1, line 8 (other income).
If the certificate was given to you by an employer as compensation, it was already taxed when you received it. Selling it does not create additional tax, because you already paid tax on the full value.
Gift certificates as business deductions
If you own a business and give gift certificates to customers or employees, the cost is deductible as a business expense. You deduct the cost to you of issuing the certificate, not the face value. If you print a $100 certificate that costs you $2 to produce, you deduct $2 (plus the cost of the goods or services you will provide when it is redeemed).
When the certificate is actually redeemed, you record the sale as normal revenue. The customer pays sales tax on their purchase, and you remit that tax to the state. The certificate itself does not change how you report the transaction.
If you offer a gift certificate promotion — for example, "buy a $50 certificate, get $10 free" — the $10 discount is a business expense. You deduct it in the year the certificate is redeemed, not in the year it was issued.
State-specific rules on gift certificates
Most states follow the federal rule that gift certificates are not taxable income when received. However, some states have specific rules about what happens if a certificate is never redeemed or if it expires.
A few states treat unclaimed gift certificate balances as abandoned property that eventually goes to the state. This does not create a tax bill for you, but it means the retailer must eventually turn over the money. Some states also require retailers to honor certificates indefinitely or to refund the balance if the business closes.
These are consumer protection and property laws, not tax laws. They do not affect whether you owe income tax on a certificate you own or receive.
Frequently Asked Questions
Do I have to report a gift certificate I received on my tax return?
No. A gift certificate received as a true gift is not reported on your tax return. If it was given by an employer as compensation, it should already appear on your W-2, and you do not report it separately. You only report income when you sell the certificate for more than you paid for it.
What if I give someone a gift certificate worth more than $18,000?
You must file Form 709 (Gift Tax Return) with the IRS. However, you typically do not owe tax unless you have already given away more than $13.61 million in your lifetime (the 2024 lifetime exemption). Most people will never reach that threshold. Filing the form preserves your exemption but does not result in a tax bill.
Is sales tax charged when I use a gift certificate?
Yes. Sales tax is charged on the items you purchase with the certificate, at the same rate that would explore if you paid with cash. The certificate is treated as payment, and tax is calculated on the purchase price of the goods or services.
Can I deduct a gift certificate I gave to someone as a charitable donation?
Only if you gave it to a may have access to charitable organization. If you gave a certificate to a friend or family member, it is a personal gift and not deductible. If you gave it to a charity, you can deduct the fair market value of the certificate on Schedule A, subject to the same limits as other charitable gifts.
What happens to my tax situation if a retailer goes out of business and my certificate becomes worthless?
You cannot claim a tax loss. Gift certificates are not treated as property with a tax basis. The loss is personal and not deductible on your tax return, even if the certificate had significant value.