The story opens with $1.87. That's all Della Dillingham Young has to buy a present for her beloved husband, Jim. And the next day is Christmas. Faced with such a situation, Della promptly bursts into tears on the couch, which gives the narrator the opportunity to tell us a bit more about the situation of Jim and Della. The short of it is they live in a shabby flat and they're poor. But they love each other.
Once Della's recovered herself, she goes to a mirror to let down her hair and examine it. Della's beautiful, brown, knee-length hair is one of the two great treasures of the poor couple. The other is Jim's gold watch. Her hair examined, Della puts it back up, sheds a tear, and bundles up to head out into the cold. She leaves the flat and walks to Madame Sofronie's hair goods shop, where she sells her hair for twenty bucks. Now she has $21.87 cents.
With her new funds, Della is able to find Jim the perfect present: an elegant platinum watch chain for his watch. It's $21, and she buys it. Excited by her gift, Della returns home and tries to make her now-short hair presentable (with a curling iron). She's not convinced Jim will approve, but she did what she had to do to get him a good present. When she finishes with her hair, she gets to work preparing coffee and dinner.
Jim arrives at 7pm to find Della waiting by the door and stares fixedly at her, not able to understand that Della's hair is gone. Della can't understand quite what his reaction means.
After a little while, Jim snaps out of it and gives Della her present, explaining that his reaction will make sense when she opens it. Della opens it and cries out in joy, only to burst into tears immediately afterward. Jim has given her the set of fancy combs she's wanted for ages, only now she has no hair for them. Jim nurses Della out of her sobs. Once she's recovered she gives Jim his present, holding out the watch chain. Jim smiles, falling back on the couch. He sold his watch to buy Della's combs, he explains. He recommends they put away their presents and have dinner. As they do so, the narrator brings the story to a close by pronouncing that Della and Jim are the wisest of everyone who gives gifts. They are the magi.