Gift Cards: The Five-Year Rule, Fees and the Liability

The five-year rule on the funds

The core requirement is about the funds rather than the plastic. Regulation E requires that "the expiration date for the underlying funds is at least the later of: Five years after the date the gift certificate was initially issued, or the date on which funds were last loaded". A card can carry an earlier expiration date than the funds behind it — that is contemplated by the rule — but then the disclosures have to make the position clear, and the consumer must be able to get the value. The rule requires disclosure of both the card expiration date and the funds expiration date, or a statement that the funds do not expire, along with a toll-free number consumers can use for information about a replacement card. The FTC puts the consumer-facing version plainly: money on a gift card cannot expire for at least five years from purchase or from the last load, and where the date printed on the card is earlier than that, the money can be transferred to a replacement card at no cost. If you are designing a card, the simplest safe answer is the one most small merchants land on — do not print an expiry at all.

Dormancy and inactivity fees

The rule does not ban these fees; it constrains them sharply. A dormancy, inactivity or service fee may be imposed only where there has been "no activity with respect to the certificate or card, in the one-year period ending on the date on which the fee is imposed", and "not more than one dormancy, inactivity, or service fee is imposed in any given calendar month". The disclosure requirements sit alongside: the card must state the amount of any such fee, how often it may be assessed, and that it may be assessed for inactivity. For most independent retailers the practical conclusion is that a fee is not worth the compliance surface it creates — but if you run one, the one-year and one-per-month limits and the on-card disclosures are the specific things to check against your provider's template.

Which cards are not covered

Regulation E's gift card rules exclude several categories, and knowing them prevents both over-compliance and under-compliance. Excluded are: cards issued in connection with a loyalty, award or promotional programme; cards not marketed to the general public, such as those used for insurance settlements, store credit or tax refunds; certificates where the sole means of issuing the card, code or device is in paper form; reloadable cards that are not marketed or labelled as gift cards or gift certificates; cards redeemable solely for admission to events or venues, including affiliated locations; and prepaid cards for telephone or VoIP service. The loyalty exclusion is the one that catches people, because it is conditional on four disclosures being present on or with the card — if a promotional card misses them, it is not excluded, and the five-year rule and fee restrictions apply to it. That is covered separately in our loyalty guide.

The money is an advance payment

The accounting instinct — record the sale as a liability, recognise revenue on redemption — is the right commercial picture, but it is not automatically the tax answer. IRS Publication 538 states the general rule: "Generally, you report an advance payment for goods, services, or other items as income in the year you receive the payment." It also confirms that "Certain gift card sales are considered advance payments and eligible for the deferral method". For an accrual-method taxpayer, the deferral method election allows you to "postpone including the advance payment in income until the next year. However, you cannot postpone including any payment beyond that tax year" — so the deferral is one year, not open-ended until redemption. Eligibility has three conditions: full inclusion in gross income in the year of receipt must be a permissible method of accounting for you; a portion of the payment must be included in revenue in your applicable financial statement for a subsequent tax year, or, with no applicable financial statement, earned by you in a subsequent tax year; and the payment must be for goods, services or other items the Secretary has identified. This is general information, not tax advice — the election and its mechanics are a conversation with your accountant, and the timing matters most for merchants whose gift card sales cluster in December.

Unredeemed balances and unclaimed property

Breakage — value that is never redeemed — is where the liability question turns into a legal one, and it is the part we cannot give you a single answer on. Unclaimed property rules are set at state level in the US and provincially in Canada, and they differ on the fundamentals: whether gift card balances are reportable at all, what dormancy period applies, and what a holder has to file and when. We checked for a state source that could be quoted here and did not find one that loaded with the detail needed, so rather than generalise: the rules vary by jurisdiction, and this is a question for your accountant or a lawyer in the state or province where you sell. Treat any blanket claim that unredeemed balances are simply yours to keep after a period as something to verify, not something to act on.

Network-branded cards behave differently from your own

There are two distinct products here, and the FTC's framing is useful: retail gift cards, redeemable only at the retailers and restaurants that sell them, and bank gift cards, which carry a payment network logo and work wherever that brand is accepted. If you sell or accept network-branded prepaid cards, card network rules apply on top of Regulation E. One to know: Visa's Core Rules state that a prepaid card must not be redeemed for cash by a merchant that accepts it. A customer presenting a $50 prepaid card for a $30 purchase does not get $20 from your drawer. Your own store card is your own liability and your own terms, within the federal floor; a network card is not.

Running the programme

Digital cards can be bought and delivered within minutes, which is the whole of their advantage — they capture gifting decided at the last moment, which physical stock on a rack cannot. Physical cards still earn their place as an impulse purchase at the counter. On fees, the sale of a gift card is a card transaction like any other and carries processing cost on the purchase; redemption is normally a balance movement rather than a card transaction. And before you print anything, settle the wording: the FTC notes it has brought enforcement actions against companies for deceptive marketing of gift cards, and the terms on the card are the first thing anyone reads back to you.