William Sydney Porter's pen name, O. Henry, is an American short story writer whose well-known work is The Gift of the Magi. On December 10, 1905, the story debuted in The New York Sunday World. On April 10, 1906, it was included in O. Henry's collection The Four Million.

A young married couple named James, also known as Jim, and Della Dillingham are the subject of the story. The couple resides in a modest apartment and has very little money. The only two items they own together that they value highly are Della's glossy, long hair that reaches almost her knees and Jim's gold pocket watch, which belonged to both his father and grandfather.

Della is running out of time on Christmas Eve to get Jim a gift. It's Christmas Eve. Della has $1.87 left over after paying all of the bills, which she will use for Jim's Christmas gift. In a desperate attempt to find him the ideal present, she ventures outside on a chilly December day and searches store windows for something within her budget.

She would like to get Jim a chain for his pocket watch, but none of them are within her budget. Della rushes home, takes off her gorgeous hair, and stands in front of the mirror, appreciating and reflecting on it. She dashes outside once more and gets her hair chopped short to sell after having an epiphany. Della sells her hair for $20, which is barely enough to cover the cost of the platinum.

Jim looks at Della when he gets home from work, trying to determine what makes her unique. She acknowledges that she had sold her hair to pay for his gift. However, Jim casually takes a package out of his overcoat pocket and gives it to her before she can give it to him. Within, Della discovers two pricey ornate hair combs that she had long admired but were now completely useless due to her hair cut. She jumps up and gives Jim her gift—the watch chain—while trying not to cry. Jim flatly tells Della that he sold his watch to pay for her combs, shrugs, and falls onto the worn-out sofa.

The narrative concludes with a comparison between Jim and Della's presents and the gifts that the three wise men, or Magi, brought to Baby Jesus in the manger during the biblical Christmas story. After all, those who give out of love and self-sacrifice are truly wise because they understand the value of self-giving love, the narrator concludes, and Jim and Della are far wiser than the Magi because their gifts are gifts of love.