Gift certificates are taxable income only to the person or business that receives them as payment for goods or services
If someone gives you a gift certificate to spend at a store, you do not owe tax on it. The certificate itself is not income—it is a voucher for merchandise. You only pay sales tax when you actually use it to buy something, just as you would if you paid cash.
The tax situation changes if you receive a gift certificate as compensation for work or as a business transaction. An employer who gives you a $100 gift certificate instead of a $100 bonus must report it as wages on your W-2 form, and you owe income tax on it. A business that receives gift certificates from customers has already collected sales tax at the time of purchase, so no additional tax is due when the certificate is redeemed.
Key Takeaways
- A gift certificate given to you as a personal gift carries no tax obligation until you use it to buy something, at which point you pay the normal sales tax on your purchase.
- Gift certificates received as payment for work or services are taxable income and must be reported by the employer or payer on a tax form like a W-2 or 1099.
- Businesses that sell gift certificates collect sales tax upfront from the buyer, not from the person who redeems the certificate later.
- The IRS treats gift certificates the same way it treats the cash equivalent—if it is compensation, it is taxable; if it is a personal gift, it is not.
When a gift certificate counts as taxable income
A gift certificate becomes taxable when it is given to you in exchange for something of value. If your employer gives you a $50 gift certificate as a holiday bonus or performance reward, that certificate is wages. Your employer must report it on your W-2 form in the same way they would report a cash bonus, and you will owe income tax on the amount.
The same rule applies if you receive a gift certificate from a client, customer, or business partner as payment for services rendered. A contractor who receives a $200 gift certificate for completing a job must report that as business income. A freelancer paid in gift certificates instead of cash owes self-employment tax on the value.
The key distinction is whether the certificate was given as a gift or as compensation. A gift has no strings attached and is given out of generosity. Compensation is given in return for work, goods, or services. If there is any expectation that you earned it through your labor or business activity, the IRS treats it as taxable income.
Sales tax on gift certificates when you use them
When you redeem a gift certificate at a store, you pay sales tax on the items you purchase, not on the certificate itself. The sales tax is calculated on the final price of the goods, just as it would be if you paid with cash or a credit card.
The store that sold the gift certificate already collected sales tax from the person who bought it. That tax was paid at the time of purchase, not at redemption. If you buy a $50 gift certificate, the store collects sales tax on that $50 transaction when ready. When you later use the certificate to buy a $50 item, you pay sales tax only on that item.
Some states have specific rules about how gift certificates are taxed, particularly if the certificate expires or if there is a service fee attached. A few states require stores to hold the sales tax in reserve until the certificate is actually used, but most states follow the standard rule of taxing the certificate at the point of sale.
Reporting gift certificates on your taxes
If you received a gift certificate as compensation for work, your employer or the person who paid you should report it on the appropriate tax form. Employers report gift certificates given to employees on Form W-2 as wages. Businesses and self-employed people who pay contractors or freelancers in gift certificates should report the value on Form 1099-NEC or Form 1099-MISC, depending on the type of work.
You will receive a copy of whichever form was used, and you must include that income on your tax return. The amount reported on the form is what you owe tax on, regardless of whether you have actually spent the certificate yet. The IRS considers the certificate income in the year it was received, not in the year you use it.
If you received a gift certificate as a personal gift and did not receive any tax form for it, you do not need to report it on your return. Personal gifts are not taxable income. Keep records of any gift certificates you receive as compensation so you can match them to the tax forms you receive.
How businesses handle gift certificate sales tax
From a business perspective, a gift certificate is a sale. When a customer buys a $100 gift certificate, the business collects $100 plus sales tax (if applicable in that state). The business reports that transaction as revenue in the year the certificate was sold, not in the year it is redeemed.
When a customer redeems the certificate, the business does not collect additional sales tax. The tax was already paid when the certificate was purchased. The redemption is treated as a reduction in the liability the business owes for that original sale.
Some states require businesses to set aside the sales tax collected on gift certificates until the certificate is actually used, in case the certificate expires or is never redeemed. Other states allow the business to keep the tax when ready. Check your state's tax rules if you operate a business that sells gift certificates.
Gift certificates that expire or have fees
An expired gift certificate does not create a tax problem for you as the recipient. If you received a gift certificate as a personal gift and it expires before you use it, you straightforward lose the value—there is no tax deduction and no tax owed. The original buyer may have tax implications depending on your state's unclaimed property laws, but that does not affect you.
If a store charges a service fee to use a gift certificate or deducts a monthly maintenance fee, that fee is subject to sales tax in most states. The fee is treated as a separate transaction from the original certificate purchase. You pay sales tax on the fee amount when it is charged.
Some states have laws that restrict or prohibit expiration dates and service fees on gift certificates. If your state limits these practices, the store cannot legally charge you a fee or let the certificate expire. Check your state's consumer protection laws if you encounter a store trying to charge fees on a gift certificate.
Frequently Asked Questions
Do I have to pay taxes on a gift certificate someone gave me as a birthday present?
No. A gift certificate given to you as a personal gift is not taxable income. You only pay sales tax when you use the certificate to buy something at the store. The sales tax applies to your purchase, not to the certificate itself.
My employer gave me a $200 gift certificate as a holiday bonus. Do I owe income tax on it?
Yes. A gift certificate given by an employer as compensation for work is taxable income. Your employer should report it on your W-2 form as wages. You will owe income tax on the $200 value in the year you received it, even if you have not spent the certificate yet.
What if I received a gift certificate but no tax form was issued?
If you received it as a personal gift, you do not need a tax form and do not owe tax on it. If you received it as compensation for work and no form was issued, you should still report the income on your tax return. Contact the person or business that gave you the certificate and ask them to issue the correct form.
Can I deduct a gift certificate as a business expense if I give one to a client?
Yes, if the gift certificate is a legitimate business expense. You can deduct it as a gift or promotional expense, subject to the IRS limits on business gifts (currently $25 per person per year). Keep records of who received the certificate and when.
Does the store owe tax twice—once when the certificate is sold and again when it is used?
No. The store collects sales tax once, at the time the certificate is purchased. When the certificate is redeemed, no additional sales tax is collected. The original tax payment covers the entire transaction.