The story begins with Della's despondency over the scanty amount of money she’s managed to save over the past few months by pinching pennies. She cherish a faint hope to save enough money to buy her husband Jim a worthy Christmas present. Suddenly Della glare at her reflection in a window, and let her hair fall to its full length below her knee. The author calls it "rippling and shining like a cascade of brown waters". Della’s brown hair and Jim’s gold watch, that he inherited from his grandfather, are their most valuable possessions.

Della runs to Mne. Sofronie's hair shop and sells her hair for twenty dollars. She adds a dollar to this sum and buys Jim "a platinum fob chain simple and chaste in design, properly proclaiming its value by substance alone and not by meretricious ornamentation - as all good things should do". The chain is described as possessing “quietness and value,” like Jim.

Della returns home to curl her hair with curling irons and make dinner. When Jim comes back home and enters the room, shock roots him to the spot, when he glanced at Della’s hair. Della confessed him that she did it in because she wanted to buy a Christmas present being worthy for him. Jim snaps out of his shock, hugs Della, and throws a package on the table. He explains that neither haircut nor anything could make him love her any less, but that he was surprised because of the present that he bought for her. Della opens the package and finds very expensive tortoiseshell combs for her long hair, which she had long dreamed of. She’s rapturous for a moment before it comes to her that she won't use them anymore and begins crying, and Jim has to comfort her.

Suddenly, Della remembers about her present to Jim, and asks Jim to show his watch so that she could put the new chain on it. Jim sits back on the couch, smiles and says that he sold his watch in order to buy the combs for her.

The narrator finishes by mentioning the story about the magi, who invented the art of giving Christmas presents. He compares Della and Jim to these wise men, and concludes that of all those who give gifts, these two are the wisest.