Not every gift card gets spent in full. Some are lost, some are forgotten in a drawer, and many are redeemed with a few dollars left on them. The value that’s never redeemed is known as gift card breakage. For a brand with a large program, breakage can add up to a meaningful sum, and it comes with questions about accounting, reporting and the rules on unclaimed balances. This guide explains what breakage is, why it happens and how brands manage it responsibly.
What is gift card breakage?
Gift card breakage is the value on gift cards that customers never redeem. When a customer buys a $50 card, the brand receives $50 upfront but hasn’t yet delivered anything for it. It owes that value to whoever holds the card. If the holder spends $45 and never comes back for the last $5, that $5 is breakage.
Breakage applies mostly to closed-loop gift cards, which are issued by the brand and can only be spent with it. For open-loop cards, the rules and the parties involved differ.
Why breakage happens
- Small leftover balances. A few dollars left on a card often aren’t worth a trip back.
- Lost or forgotten cards. Physical cards get lost; digital cards get buried in an inbox.
- Gifts that don’t fit. The recipient doesn’t shop with the brand often, or at all.
- Expired cards, where the rules allow expiry.
- Friction. Hard-to-find balance checks or clunky redemption put customers off.
Gift cards are a liability until they’re redeemed
The money from a gift card sale isn’t revenue on day one. Until the card is redeemed, the brand owes its value to the cardholder, so outstanding balances sit on the balance sheet as a liability (often called deferred revenue). Revenue is recognized when the card is spent. Breakage is the part of that liability the brand expects never to be claimed.
For a growing program, the outstanding liability can become large. Tracking it accurately, card by card, is one of the core jobs of a gift card program.
How breakage is accounted for
How and when breakage can be recognized as revenue is set by accounting standards: ASC 606 in the US and IFRS 15 internationally. Broadly, a brand that can reliably estimate how much value won’t be redeemed can recognize breakage over time, in line with the pattern of redemptions, rather than waiting for cards to expire. A brand that can’t make that estimate has to wait until the chance of redemption is remote.
Either way, the estimate depends on good data: how much is sold, when cards are redeemed, how much is left on them and how that changes over time. The right treatment for a specific program is a decision for the brand’s finance team and auditors.
Unclaimed property and escheatment
In many US states, unspent gift card balances can count as unclaimed property. After a set period, the brand may have to report them and hand the value to the state (escheatment) rather than keep it as breakage. The rules depend on the state, the type of card and how the program is structured, and they differ again outside the US. Our gift card regulations guide covers the rules by market.
Should brands aim for breakage?
Breakage can look like free margin, but building a program around it is a mistake:
- Redeemed cards bring customers through the door. A redeemed card is a visit, and customers often spend more than the card’s value.
- Unspent cards are a poor customer experience. A card that’s hard to use reflects badly on the brand that issued it.
- Regulators and customers notice. Fees and short expiry dates that eat into balances are restricted in many markets and damage trust.
The healthier approach is to make cards easy to spend and to treat breakage as a by-product to be measured accurately, not a target.
How brands manage breakage and gift card liability
- Track every card. Know the balance on every card, by product, channel and market, at all times.
- Report regularly. Give finance up-to-date figures on outstanding liability, redemption patterns and unspent balances.
- Make balances easy to use. Clear balance checks, reminders and simple redemption online and in store.
- Keep terms clear and compliant. Expiry and fee rules that match the law in each market.
- Plan for unclaimed property. Know which balances may become reportable, and when.
How epay Conductor helps
As a gift card issuer, epay tracks and accounts for unredeemed balances and makes sure gift card funds are recorded correctly throughout their lifecycle. Brands get reporting on every card, and epay handles the regulatory side, including escheatment. See how epay Conductor works or request a demo.
Gift card breakage FAQs
What is the breakage rate on gift cards?
The share of total gift card value that’s never redeemed. It varies by brand, sector and card type, and is usually estimated from the program’s own redemption history.
Is gift card breakage profit?
Not straightaway. Breakage only becomes revenue once accounting rules allow it to be recognized, and in some places unclaimed balances must be handed to the state instead.
How is gift card breakage estimated?
From historical data: how much value is redeemed over time after cards are sold, and how much tends to be left unredeemed.
Does breakage apply to digital gift cards?
Yes. Digital and physical cards work the same way. Digital cards are harder to lose, but balances still go unspent when the email is forgotten or the leftover amount is small.
