Why Can’t You Buy a Gift Card With a Gift Card?

Gift cards are a popular and convenient way to give presents, allowing recipients to choose items they truly desire. Many people encounter a common restriction when attempting to use a gift card: the inability to purchase another gift card with it. This policy is widespread across retailers for specific and interrelated business reasons.

Combating Fraud and Illicit Transactions

The primary reason retailers prohibit buying a gift card with another gift card is to prevent fraud and illicit financial activities. Gift cards, unlike traditional financial instruments such as debit or credit cards, are largely untraceable and do not require identification for purchase or redemption.

This anonymity facilitates money laundering, where illegally obtained funds are converted into gift cards to obscure their origin. Criminals can purchase gift cards with stolen credit card numbers or other illicit proceeds, then use those gift cards to buy new gift cards, effectively “washing” the funds and making them harder to trace.

This policy acts as a barrier against various criminal schemes, including scams where victims are coerced into buying gift cards. For instance, in “card draining” schemes, criminals tamper with physical gift cards in stores, record the card numbers and PINs, then replace them on shelves. When an unsuspecting customer loads money onto the card, the criminal quickly drains the funds before the legitimate purchaser can use them. Allowing gift card exchanges would create a seamless method for these ill-gotten gains to be converted into new, untraceable assets, enabling criminals to “cash out” large sums without direct links to bank accounts or personal identities. This policy helps mitigate the risk of retailers inadvertently participating in money laundering operations.

Retailer Policies and Financial Management

From a retailer’s perspective, gift cards are treated as a liability on their balance sheet, not immediate revenue. When a gift card is sold, the cash is received, but the retailer incurs an obligation to provide goods or services in the future. This is recorded as “deferred revenue” or “unearned revenue.” The revenue is only recognized when the gift card is redeemed for merchandise or services.

Allowing one gift card to purchase another does not generate new sales or revenue for the retailer; it merely shifts a liability from one gift card to another. This transaction complicates internal financial tracking, as it creates a circular flow of liabilities without a corresponding sale of goods. Furthermore, retailers must comply with unclaimed property (escheatment) laws, which require them to remit unredeemed gift card balances to states after a specified dormancy period. This process involves reporting unredeemed amounts.

Gift cards are not considered legal tender or currency but rather a form of prepaid store credit. Retailers set terms of use to manage their financial exposure and operational efficiency.

Prohibiting gift card purchases with other gift cards simplifies accounting for these liabilities, reduces the complexity of managing potentially ever-shifting balances, and ensures compliance with various state regulations regarding unredeemed funds. This approach helps retailers maintain accurate financial records and avoid regulatory complications.