Are Gift Cards Free? How Their Value Is Actually Paid For

Gift cards are a common convenience, often received as tokens of appreciation or rewards. While they may feel like a “free” bonus to the recipient, their value always originates from a financial transaction or a calculated business allocation. Someone has always paid for or accounted for their underlying worth.

How Gift Cards Are Acquired

Individuals typically obtain gift cards through direct purchase or various promotional methods. When a consumer buys a gift card, they exchange payment for its stated value. From a business accounting perspective, the sale of a gift card is not immediately recognized as revenue; instead, it is recorded as a liability, often termed deferred revenue, on the balance sheet. This is because the business has received payment but has not yet provided the goods or services for which the card can be redeemed. Revenue is only recognized when the card is used by the holder to make a purchase.

Beyond direct purchases, gift cards are frequently acquired through promotional activities. Businesses issue gift cards as rewards in loyalty programs, cashback incentives, or as part of marketing campaigns. The cost of these promotional cards is absorbed by the issuing company, typically categorized as a marketing expense or a reduction in the transaction price. While the recipient does not directly pay for these cards, the value is covered by the business’s budget, representing an investment in customer engagement or sales promotion.

Gift cards can also be provided to employees as bonuses or incentives. The Internal Revenue Service (IRS) generally considers these gift cards as cash equivalents, meaning their value is taxable income to the employee. The employer is required to report this value on the employee’s Form W-2 and withhold applicable federal and state taxes. Similarly, when a store issues a gift card in exchange for returned merchandise, it is generally treated as if a cash refund was provided and then immediately used to purchase a new gift card, creating a new liability for the business.

Understanding Gift Card Value and Limitations

Even after a gift card is acquired, its value can be affected by various terms and conditions. Federal law, specifically the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, stipulates that most retail and bank-issued gift cards cannot expire in less than five years from the date of activation or the last time funds were added. Many jurisdictions have implemented additional laws that extend or prohibit expiration dates.

Inactivity or dormancy fees are another factor that can diminish a gift card’s value. Federal regulations permit these fees only if there has been no activity on the card for at least one year, and only one fee may be charged per calendar month. The policy must also be clearly disclosed on the card. However, many state laws provide stronger consumer safeguards, with some entirely prohibiting these fees or setting longer inactivity periods before they can be applied.

Gift cards often come with usage restrictions. They are typically redeemable only at the issuing merchant or within a specific network of affiliated businesses. Generally, gift cards cannot be converted into cash, though some state laws mandate cash redemption for small remaining balances, usually under a specified threshold, such as $5 or $10. Additionally, lost or stolen gift cards frequently carry the same risk as cash; their value may not be recoverable. While some issuers may replace them if the card was registered or if the original purchase receipt is available, this is not always guaranteed and could involve a replacement fee.

Businesses track unredeemed gift card balances, which are sometimes referred to as “breakage.” These unspent funds can become subject to state unclaimed property laws, also known as escheatment, after a specified dormancy period, typically ranging from two to five years. Businesses are generally required to remit these unclaimed funds to the state. However, some states exempt gift cards from escheatment, particularly if they have no expiration dates or inactivity fees. Consumers can usually check their gift card balance online or by contacting the issuer, a practice that helps prevent the loss of value due to dormancy or expiration.