When and How Is Tax Charged on Gift Cards?

Gift cards are a widely adopted payment method, offering convenience for both givers and recipients. They allow individuals to purchase goods and services across numerous retailers. Understanding the tax implications of gift cards can be confusing for many consumers and businesses.

Sales Tax and Gift Cards

Sales tax is not applied when a gift card is initially purchased. This is because a gift card is viewed as a form of payment or a stored value instrument, rather than a tangible good or service. The transaction is considered a transfer of funds, much like depositing money into a bank account. Sales tax regulations do not impose a tax on the exchange of money for a future purchasing capability.

Sales tax is levied when the gift card is redeemed for taxable goods or services. When a consumer uses a gift card to purchase an item subject to sales tax, the tax is applied to the price of that item, just as it would be if cash, a debit card, or a credit card were used. For example, if a gift card is used to buy a shirt, the sales tax will be calculated on the shirt’s price. The gift card does not reduce the sales price of the item; it simply acts as a method of payment.

Sales tax rules for gift cards are largely consistent across jurisdictions, though specific rates and what constitutes a taxable item can vary. Most states adhere to the principle that the tax is on the underlying transaction, not the gift card itself. This approach avoids double taxation, where tax might be applied both at the purchase of the card and again at its redemption. Retailers are responsible for collecting the applicable sales tax when the gift card is used to acquire taxable goods or services.

Income Tax and Gift Cards

Receiving a gift card can have income tax implications for the recipient, depending on the circumstances. The Internal Revenue Service (IRS) considers gift cards as taxable income if provided as compensation or an award for services performed.

Employee Gift Cards

Gift cards given to employees are considered taxable wages. This includes gift cards provided as compensation, bonuses, performance incentives, or holiday gifts. The value of the gift card must be included in the employee’s gross income and reported on their Form W-2, subjecting it to federal income tax withholding, Social Security, and Medicare taxes.

The “de minimis fringe benefit” rule, outlined in IRS Publication 15-B, provides a narrow exception for certain small, infrequent benefits. However, gift cards do not qualify as de minimis benefits. This is because gift cards are considered cash equivalents, meaning they have a readily ascertainable value and are easily convertible to cash or used for general merchandise. Even a small gift card to a general retailer is taxable income.

For example, while a holiday turkey or a small, tangible item might be considered a de minimis benefit, a gift card, regardless of its amount, is not. The IRS aims to prevent employers from circumventing wage reporting and tax obligations by compensating employees with cash equivalents. Employers are responsible for correctly withholding and reporting the value of these gift cards as part of the employee’s taxable income.

Gift Cards as Prizes or Awards

Gift cards received as prizes in contests, sweepstakes, or awards are considered taxable income to the recipient. This applies whether the prize is from an employer, a business, or a public contest. The fair market value of the gift card is taxable, and recipients may receive a Form 1099-MISC if the value exceeds $600 in a calendar year. This ensures the value received is accounted for as income.

Personal Gifts

Gift cards received as personal gifts, such as from family or friends, are not considered taxable income to the recipient. The IRS views these as true gifts, which are not subject to income tax for the person receiving them. The responsibility for any potential gift tax falls on the giver for amounts that exceed the annual gift tax exclusion, not on the recipient. This exclusion amount is substantial, meaning most personal gift card exchanges fall below any taxable threshold for the giver.