Gift certificates themselves are not taxed when you buy or receive them

A gift certificate is not income to the person who receives it, and buying one does not trigger a tax bill for the person who gives it. The certificate is just a promise to exchange it for goods or services later. Until that exchange happens, there is nothing to tax.

What gets taxed is the actual purchase you make when you use the certificate. If you buy a $50 sweater with a $50 gift certificate, the sweater is taxed the same way it would be if you paid cash — that is, sales tax applies if your state or locality charges it on clothing. The gift certificate itself was never the taxable event.

Key Takeaways

  • Receiving a gift certificate is not taxable income, and giving one does not create a tax deduction for the giver.
  • Sales tax applies to what you buy with the certificate, not to the certificate itself.
  • If a business issues a gift certificate, they may owe income tax on the money they received when the certificate was sold, depending on their accounting method.
  • Gift cards to restaurants, stores, and services follow the same tax rules as gift certificates.
  • If you receive a gift certificate as an employee bonus or prize, your employer may report it as taxable wages.

When the person who receives the certificate owes nothing

The IRS does not treat a gift certificate as a gift in the tax sense. A gift is money or property transferred without expecting anything in return. A gift certificate is a conditional promise — you get goods or services in exchange. Because the recipient has not yet received anything of value, there is no taxable event.

This is true whether the certificate came from a friend, a family member, or a stranger. The person who receives it does not report it on their tax return, and it does not reduce any tax credits or deductions they might claim.

Sales tax on what you buy, not on the certificate

When you use a gift certificate to buy something, sales tax applies to that purchase just as it would if you paid with cash or a credit card. If you live in a state that taxes clothing and you use a $50 gift certificate to buy a shirt, you owe sales tax on the shirt. The certificate was not taxed; the shirt was.

Some states do not tax certain items — groceries, for example, are often exempt — so a gift certificate to a grocery store might result in no sales tax at all. The tax depends on what you buy and where you live, not on the fact that you are using a certificate.

If the certificate is worth more than the item you buy, you may receive change. That change is not taxed either. If you buy a $30 item with a $50 certificate and receive $20 in cash, that $20 is straightforward your money back.

What businesses owe when they sell gift certificates

From the business's side, the tax picture is different. When a store sells you a $100 gift certificate, they receive $100 in cash. Whether they owe income tax on that money depends on their accounting method.

A business using the accrual method — which means they record income when they earn it, not when they receive the cash — does not owe income tax on the certificate sale itself. They owe tax only when you redeem it and they deliver the goods or service. Until then, the $100 is a liability on their books, not income.

A business using the cash method — which means they record income when they receive the cash — does owe income tax on the $100 when they sell the certificate. This is one reason some small businesses prefer the accrual method: it matches the tax obligation to the actual delivery of goods.

Gift certificates given as employee bonuses or prizes

If your employer gives you a gift certificate as a bonus, a holiday gift, or a prize, the rules change. Your employer must report the value of that certificate as taxable wages on your W-2 form, just as they would if they gave you cash.

This applies even if the certificate is to a restaurant or store you would have chosen yourself. The IRS treats it as compensation for work, not as a personal gift. Your employer withholds income tax, Social Security tax, and Medicare tax on the value, so the amount that appears on your W-2 is higher than the certificate's face value by the amount of those taxes.

The one exception is a de minimis gift — something so small that the IRS does not consider it taxable. A $5 gift card might fall into this category, but a $50 one will not. The threshold is low and depends on the facts of each situation, so if you receive a small certificate from your employer, ask your HR department whether they are reporting it.

Gift cards and digital certificates follow the same rules

A gift card to a store or restaurant is taxed exactly like a paper gift certificate. The card itself is not taxable income to the recipient. Sales tax applies to what you buy with it. The business that issued it may owe income tax on the sale depending on their accounting method.

Digital gift certificates — codes you receive by email that you can redeem online — work the same way. The code is not taxable. The purchase you make with it is subject to sales tax. The business's tax obligation depends on when they recognize the income.

What happens to unused gift certificates

If you never use a gift certificate, you do not owe any tax on it. It straightforward expires or becomes worthless, and there is no tax consequence to you. You cannot deduct the loss on your personal tax return.

The business that issued it may be able to recognize the value as income once the certificate expires and the obligation to deliver goods is gone. This varies by state and by the business's accounting method. Some states have laws requiring businesses to turn over unclaimed gift certificate balances to the state after a certain period, which also affects when the business can claim the income.

Frequently Asked Questions

Do I have to report a gift certificate I received as income?

No, unless it was given to you by your employer as a bonus or prize. A gift certificate from a friend, family member, or business promotion is not reported on your tax return. Only employer-issued certificates must be reported as taxable wages.

Can I deduct the cost of a gift certificate I give someone?

No. A personal gift is never tax-deductible, whether it is cash, a gift certificate, or anything else. If you give a gift certificate to a business client or employee as part of your business, you may be able to deduct it as a business expense, but the rules are strict and depend on your situation.

What if I buy something with a gift certificate and it goes on sale?

Sales tax is calculated on the price you pay at the register, not on the original price. If an item is marked down, you owe sales tax on the lower price. The gift certificate is straightforward treated as payment, like cash or a card.

Does my employer have to tell me if they are reporting a gift certificate as taxable wages?

They should, because it will appear on your W-2 and affect your tax return. If you receive a gift certificate from your employer and are unsure whether it is being reported, ask your HR or payroll department before tax time.

Can I give someone a gift certificate without them owing taxes?

Yes. The person who receives it owes no tax. You, the giver, also owe no tax and cannot deduct it. The only tax that applies is sales tax when they use it to buy something, and that depends on what they buy and where they live.