Gift cards make money for the companies that issue them through four main channels: balances that never get redeemed (called breakage), investment returns on the cash collected before cards are spent (the float), fees charged at purchase and during inactivity, and the extra spending recipients add on top of the card’s face value. A tax timing benefit sits on top of all four. The U.S. gift card market was estimated at roughly $200 billion in annual sales as of 2023, split between closed-loop cards tied to a single retailer and open-loop cards branded with a network logo like Visa or Mastercard.
Breakage: The Money That Never Gets Spent
Breakage is the industry term for gift card balances consumers never redeem. That leftover money eventually converts to revenue for the issuer without the company delivering any product or service in exchange. Starbucks, which runs one of the largest stored-value card programs in the country, reported $207.6 million in breakage revenue in 2024 alone. Across the entire retail sector, breakage adds up to billions annually.
The accounting works like this. When a company sells a gift card, it records the cash received as a liability because it owes the cardholder goods or services. Under the ASC 606 accounting standard, the company estimates the percentage of balances that will never be redeemed and recognizes that portion as revenue gradually, in proportion to actual redemptions over time. A retailer that historically sees 8% of its gift card balances go unspent can begin booking that 8% as income as cardholders spend down their other balances. Much of this revenue hides in the small residual amounts left on millions of cards, sometimes just a few dollars or cents.
Federal law prohibits gift card funds from expiring sooner than five years after issuance or the last date funds were loaded onto the card.1Office of the Law Revision Counsel. 15 USC 1693l-1 General-Use Prepaid Cards, Gift Certificates, and Store Gift Cards That floor helps consumers but doesn’t prevent breakage. Cards get lost, damaged, or forgotten, and once a company determines that a balance is statistically unlikely to be redeemed, the accounting standards allow the shift from liability to revenue.
When States Take the Unspent Money Instead
Breakage has a significant catch. In roughly a dozen states, unused gift card balances are treated as abandoned property after a dormancy period, and the issuer must turn that money over to the state treasury rather than booking it as profit. Dormancy periods typically run three to five years of inactivity, depending on the state. The remaining 38 or so states exempt gift cards from their unclaimed property statutes, so issuers in those jurisdictions can eventually recognize the full unredeemed balance as revenue.
This patchwork creates real strategic behavior. Because gift card buyers rarely provide their address at the register, the issuer’s home state usually has first claim on any escheatable balances under Supreme Court priority rules. Some companies structure their gift card programs through subsidiaries based in states with more favorable escheatment laws. Under generally accepted accounting principles, a company can’t recognize breakage income until it determines it has no legal obligation to remit those unredeemed balances to a state government, and that analysis has to happen card program by card program, state by state.
The Float: Earning Returns on Customer Cash
The float is the window between when a consumer buys a gift card and when the recipient finally spends it. During that gap, the issuer holds the cash. For an individual $50 card sitting unused for two months, the financial benefit is trivial. Across millions of outstanding cards, the aggregate cash pool is enormous, and it behaves like a permanent, interest-free deposit because new card sales constantly replace redeemed ones.
Companies put this cash to work in several ways. Some park it in short-term interest-bearing instruments. Others use the liquidity to fund daily operations or reduce their reliance on commercial borrowing. When interest rates are elevated, the return on hundreds of millions in floated gift card funds is meaningful. The key point is that this money has no borrowing cost attached. Unlike a bank loan or a bond issuance, the company pays no interest to the consumers who provided the capital.
Recipients Spend More Than the Card Is Worth
Gift cards reliably get people to spend more than the card’s face value, a phenomenon the retail industry calls uplift. When a recipient walks into a store with a $50 gift card, the card functions psychologically more like a coupon than like cash. Spending beyond the balance feels less painful because the first $50 was someone else’s money. A $50 card frequently turns into a $65 or $75 transaction, and the overage comes straight from the recipient’s wallet at full margin for the retailer.
This effect doubles as a customer acquisition tool. A gift card recipient might be visiting a store for the first time, and the card removes the risk of trying an unfamiliar brand. Once inside, the retailer gets the chance to convert a one-time visitor into a repeat customer. The gift buyer effectively subsidized the marketing cost of acquiring a new customer, a cost the retailer would otherwise pay through advertising or promotions.
Activation, Interchange, and Dormancy Fees
Open-loop gift cards generate revenue the moment they’re purchased, through activation fees paid by the buyer at the register. These fees typically range from $2.95 to $6.95 per card, depending on the card value and retailer. The fee covers production, distribution, and network costs while leaving margin for the issuer. A consumer loading $100 onto a Visa gift card and paying a $5.95 activation fee has created a guaranteed profit for the issuing financial institution before the card is ever swiped.
Once the recipient uses the card, the issuing bank collects an interchange fee on every transaction. Interchange is the percentage that the merchant’s bank pays the card-issuing bank each time a card is processed. These fees vary by network, card type, and merchant category, but they apply to every purchase made with the card until the balance is exhausted. Closed-loop cards avoid interchange entirely since the transaction stays within the retailer’s own system, but they give up that fee revenue in exchange for keeping the customer inside their own ecosystem.
Federal law also allows issuers to charge dormancy, inactivity, or service fees, but only after at least twelve months of no activity on the card.1Office of the Law Revision Counsel. 15 USC 1693l-1 General-Use Prepaid Cards, Gift Certificates, and Store Gift Cards Some states prohibit these fees entirely. Where they’re permitted, they gradually erode the card’s balance and generate revenue from cards that might otherwise just sit as a liability. The Consumer Financial Protection Bureau requires any dormancy or service fee to be disclosed clearly on the card itself, along with the fee amount, how often it can be assessed, and a toll-free number and website for more information.2eCFR. 12 CFR 1005.20 Requirements for Gift Cards and Gift Certificates
A Tax Timing Benefit on Top
Gift card sales create a timing benefit on the company’s tax return. The IRS treats gift card revenue as an advance payment for goods or services not yet delivered. Under Treasury regulations, an accrual-method business with audited financial statements can defer recognizing gift card income for tax purposes until the following tax year, to the extent the income hasn’t been recognized on its financial statements in the year the payment was received.3Regulations.gov. Advance Payments for Goods, Services, and Other Items Any amount not recognized by the end of that following year must then be included in taxable income regardless of whether the card has been redeemed.
The practical effect is that a company selling a wave of gift cards in December doesn’t owe tax on that revenue until it files for the next tax year. For retailers with heavy holiday gift card sales, this deferral shifts significant taxable income into the following period and improves year-end cash flow. Smaller businesses without audited financial statements can use a similar deferral method with slightly different mechanics.
What Eats Into the Profits
Not all of the money flowing through gift cards ends up as profit. The Federal Trade Commission received more than 41,000 fraud reports involving gift cards and prepaid cards in 2024, representing $212 million in consumer losses. One common scheme is card draining, where a fraudster copies the card number and security code from an unactivated card on a store rack, monitors the card until a consumer loads funds onto it, and immediately transfers the balance. The consumer is left with a worthless card, and the retailer or issuer often absorbs the cost of making the customer whole. Issuers spend heavily on tamper-resistant packaging, chip-based card technology, and monitoring systems to flag suspicious redemption patterns, and those costs offset the revenue advantages.
State cash-back laws also cut into breakage. About ten states require retailers to pay out small remaining gift card balances in cash when the consumer requests it, with thresholds typically between $1 and $10 depending on the state. These laws force the issuer to eliminate exactly the small residual balances that would otherwise go unspent, and retailers operating across state lines have to configure their systems to apply different cash-back thresholds at different store locations.