Are Gift Cards Taxable Income?

Are Gift Cards Taxable Income?
Written By
Cam Merritt
Cam Merritt
Jul 17, 2011
3 minute read
Chinese woman holding shopping bags and credit card
Gifts are not taxable income -- but a gift card might not be a gift after all. Image Credit: Jose Luis Pelaez Inc/Blend Images/Getty Images

Some gifts are hard to put a value on. Gift cards, however, are not among them. They usually say right on the card exactly how much they're worth, be it $5 or $500 -- and when they do, the Internal Revenue Service views them as equivalent to cash. That means they might be considered taxable income, depending on who gives them to whom.

Gifts Are Not Income

If you get a gift card as an actual gift -- as a present from a family member or friend, say -- then it's not taxable income. You don't have to report it or pay taxes on it. There is such a thing as gift tax, but it's paid by the person giving a gift, not the recipient, and it's unlikely that a gift card would trigger it. As of 2015, for example, the federal gift tax applied only in situations where one person gave another person more than $14,000 worth of gifts in a single year.

Cards Are Fringe Benefits

Things are considerably different when a gift card comes from an employer. Under the tax code, there's really no such thing as a "gift" from an employer to an employee. Gift cards given out to workers are considered fringe benefits -- that is, non-wage compensation for the performance of services. Fringe benefits generally count as taxable income except when they are specifically excluded from taxation, which is the case with health benefits, or when they are what the IRS calls "de minimis" fringe benefits. These are benefits that are of such small value or are provided so irregularly that it wouldn't be practical for the company to try to assess the value to each individual employee.

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De Minimis Exception

De minimis fringe benefits from an employer include things like free coffee on the job, flowers on your birthday, tickets to an occasional sporting event or personal use of company equipment. Though a gift card may be of seemingly small value, the IRS has stated unequivocally that "cash equivalents" are always considered income. The question, then, is whether a gift card is a cash equivalent. It depends on the type of card. If the card can be redeemed for your choice of merchandise from the retailer that issued it, then it's a cash equivalent and is taxable. But if the card can be redeemed only for a specific item, and that item would itself qualify as a de minimis benefit, then the card may not be taxable.

Reporting as Income

Employers are responsible for reporting taxable fringe benefits paid to employees. They will be included on Form W-2, your annual wage and tax statement. Employers can also pay fringe benefits to non-employees, such as independent contractors. For example, a freelancer who gets a cash-equivalent gift card from a client is receiving a taxable fringe benefit. It's that freelancer's responsibility to report the value of the card as income.

Cam Merritt

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake…

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