What exactly is gift card breakage?

Gift card breakage is the portion of a gift card's value that never gets redeemed. It covers unclaimed property law gift cards that are lost, forgotten, or only partially spent before the customer stops using them altogether.

When a business sells a gift card, that money isn't revenue yet. It's a liability on the balance sheet, since the business now owes the customer goods or services at a future date. Breakage is what happens to that liability when the customer never comes back to claim it.

Estimates vary by source and industry, but most benchmarks put breakage somewhere in the 3% to 15% range of total gift card value sold, with tighter estimates around 2-4% for large retailers based on SEC filings, and higher figures for specialty or limited-use cards like restaurant and spa gift cards. One industry estimate puts total unredeemed gift card value in the U.S. at close to $21 billion a year.

5 reasons why breakage happens

Breakage isn't one single behavior. It's the sum of several different reasons customers never get around to using the value they were given.

Forgetfulness & loss

The most common cause is simply forgetting. A card gets tucked into a wallet, a drawer, or an email inbox and never resurfaces. One survey found that around a third of U.S. consumers admitted to forgetting about a gift card entirely.

Complexity or low perceived value

If redeeming a card feels like a hassle (a confusing code, an awkward in-store process, or an amount too small to feel worth the trip), customers are less likely to bother. A card holding a small remaining balance after a purchase often just gets abandoned rather than tracked down for a second use.

Expiration and dormancy confusion

Many customers don't know their card's expiration date, or assume it's expired when it isn't. Even where laws require most cards to remain valid for a minimum period, more than one in five consumers report believing their card had expired before they tried to use it, whether or not that was actually true.

Mismatch between the card and the recipient

A gift card for a brand or store the recipient doesn't shop at, or doesn't like, tends to sit unused far longer than one for a business they already visit regularly. This is a common cause of breakage on cards given as gifts rather than purchased for personal use.

No record once the physical card is lost

Unlike a digital account balance, a physical gift card with no attached customer profile usually can't be recovered if it's lost or damaged. Once the card itself is gone, so is any practical way for the customer to reclaim the remaining value.

Is breakage a good or bad thing?

The honest answer is that it depends on which side of the transaction you're looking at.

From a purely financial standpoint, breakage functions as found revenue for the business. The company already collected the cash at the time of purchase, and if the customer never redeems it, that value can eventually be recognized as income rather than sitting on the books as an open liability indefinitely.

From the customer's side, breakage represents value they paid for (or were gifted) and never received the benefit of. A high breakage rate isn't something to celebrate quietly, since it usually reflects friction, forgotten balances, or a redemption experience that wasn't easy enough to bother with.

There's also a brand relationship angle worth considering. A customer who never got to use their gift card isn't a customer who had a great experience with your brand, they're one who simply didn't show up again. Businesses that lean too heavily on breakage as a revenue strategy risk optimizing for unredeemed balances instead of the repeat visits and customer purchases a healthy gift card program should actually be driving.

What's a healthy amount of breakage?

There's no single number that applies to every business, since breakage rates vary meaningfully by industry, card type, and how a program is designed. That said, the range most benchmarks converge on is a useful starting point: roughly 3% to 8% of total issued card value for major retail and hospitality issuers, with specialty and limited-use cards, such as restaurant or spa cards, sometimes running higher than 10%.

A rate meaningfully above that range is worth investigating rather than treating as free revenue. It often points to something specific: a confusing redemption process, expiration terms customers don't understand, or a card design that's easy to lose track of. A rate that's unusually low, on the other hand, might simply mean your customers redeem quickly and fully, which is generally a sign of a smooth, well-designed program.

The more useful question usually isn't "is our breakage rate good or bad" in isolation, but "has it changed, and do we know why." A breakage rate that's been climbing over several quarters deserves more attention than one that's stayed flat at a modest, explainable level.

How do I calculate my breakage rate?

The basic calculation is straightforward:

Breakage rate = (Value of gift cards never redeemed ÷ Total value of gift cards sold) × 100

If you sold $100,000 worth of gift cards over a period, and historical patterns show $8,000 of that will likely never be redeemed, your breakage rate is 8%.

In practice, most businesses don't wait for cards to fully expire before estimating this. Under ASC 606's proportionate method, breakage is recognized gradually, in proportion to actual redemptions, rather than in one lump sum at expiration. If you historically see a 10% breakage rate, and customers redeem $90,000 worth of cards in a period, you'd recognize $10,000 as breakage revenue at that point, since the $90,000 redeemed represents 90% of what you expect to ultimately be claimed.

If you're a newer business without years of redemption history to draw on, a common approach is to start conservatively, somewhere in the 5-10% range, based on industry benchmarks, then refine that estimate as your own data accumulates.

How to account for breakage

Gift card breakage sits at the intersection of two separate sets of rules: financial accounting standards that govern when you can recognize breakage as revenue, and state unclaimed property laws that can require you to hand some of that value over to the government instead.

ASC 606 and breakage

Under U.S. GAAP, gift card sales aren't revenue at the point of purchase. They're recorded as a contract liability, since the business owes the customer goods or services at a future date. ASC 606 treats breakage as part of the transaction price itself, and outlines two possible paths for recognizing it, depending on whether the business expects to keep the unredeemed funds or is required to eventually remit them under state escheatment laws.

In practice, this means a company can't just wait for a card to expire and then book the full remaining balance as income. Current accounting standards require estimating an expected breakage rate upfront, based on historical redemption patterns, and recognizing that portion of revenue proportionally as other customers redeem their own cards.

Before finalizing any breakage estimate, businesses also need to check state unclaimed property, or escheatment, laws. These vary significantly by state, and some require unredeemed balances to be remitted to the government after a set dormancy period rather than allowing the business to recognize them as breakage revenue at all. Getting this sequencing wrong (treating funds as breakage income that were actually owed to the state) is one of the more common compliance mistakes businesses make with gift card programs.

Given how much this varies by jurisdiction and business structure, this is very much a "talk to your accountant" area rather than a one-size-fits-all rule, and nothing here should be taken as formal accounting or legal guidance for a specific business.

Does breakage only account for gift cards?

No. Breakage applies anywhere a customer prepays for something, or receives a promise of future value, that they might never fully redeem. Gift cards are the most common example, but the same underlying mechanic shows up in a few other places too, with some meaningful differences in how it's treated.

Loyalty points

Loyalty points work similarly to gift cards in one key way: both create a liability the moment they're issued, rather than at redemption. When a customer earns points as part of a purchase, ASC 606 treats those points as a "material right", a separate performance obligation from the original sale, since the points let the customer get future value they wouldn't otherwise receive.

The main difference is what breakage represents. With a gift card, the customer prepaid actual cash. With points, the customer effectively paid for them as part of an earlier purchase, so a portion of that original sale gets deferred and allocated to the points themselves, then recognized as revenue only once those points are redeemed or expire. The core formula is broadly the same shape as gift card breakage: outstanding points times an expected redemption rate times the cost per point, giving you the liability still sitting on the books.

Prepaid & credits

Prepaid balances and store credit follow much the same logic as gift cards, since both represent cash collected in advance for goods or services not yet delivered. The liability sits on the books until redeemed, and any portion unlikely to ever be claimed can eventually be recognized as breakage revenue, subject to the same unclaimed property considerations that apply to gift cards.

One practical difference: store credit is often issued as compensation (a return, a goodwill gesture, a loyalty perk) rather than sold directly, which can affect how it's classified and whether escheatment rules even apply in the same way a purchased gift card would be subject to.

Vouchers

Vouchers sit closest to gift cards in terms of accounting treatment, since both are typically prepaid instruments tied to a specific future purchase. The main practical difference tends to be scope: a voucher is often tied to a specific product, promotion, or campaign with a defined expiration, while a gift card usually holds general-purpose value across a broader range of purchases.

That narrower scope can actually push voucher breakage rates higher in practice, since a voucher restricted to a specific item or short redemption window gives customers fewer paths to actually use it before it lapses.

Final word

Breakage is a normal, expected part of running any program built on prepaid value, whether that's gift cards, loyalty points, store credit, or vouchers. It isn't inherently good or bad, it's simply what happens when customers don't fully claim something they were given.

The businesses that handle it well treat it as something to measure and account for accurately, not something to quietly maximize. Getting the accounting right (estimating a defensible breakage rate, staying on top of state unclaimed property rules, and revisiting the numbers as real redemption data comes in) matters far more than trying to squeeze extra revenue out of customers who simply forgot what they were owed.