It's Christmastime at Whit's End. Whit, Tom, and Officer Harley are setting up the tree, and Connie is doling out hot chocolate. Two of the kids are arguing about the meaning of giving gifts. Whit tries to convince them that "it's not the gift but the thought that counts," and "it's more blessed to give than to receive." When the kids scoff at this, Whit comically presents for them the O. Henry story, Gift of the Magi, told in the style of a "Fractured Fairy Tale."

Madge, a very poor woman, is upset over how she can't afford to buy a really nice Christmas present for "her guy, Guy." Her mother, Ethel, tries to convince her to go to get her hair cut at Pop's Top Notch Top Shop for twenty dollars. Madge is hesitant because her long, silky hair that falls almost to the floor is one of the two most prized possessions that are shared between the couple. The other is Guy's antique, familial heirloom watch, with a beautiful case, ivory face plate, and whenever opened, plays a touching little melody.

Madge that decided to go shopping to take her mind off her dilemma. However, while she walked past Fishbine's Jewelers she saw a beautiful gold chain in the display window that would go perfectly with Guy's watch. She asked Morty Fishbine how much the chain would cost. It turned out to be a valuable heirloom, but it would be sold for $20. Madge decided to take drastic action and go to Pop's Top Notch Tops shop to have her hair cut for the twenty dollars she needed.

On her way back to Fishbine's Jewelers, she found the store was closed and that the chain was packed away for a New Year's Day sale. Just as she starts to cry, and since Mr. Fishbine can't stand a woman crying, he allows her to buy the chain. After an hour long confusion about "her guy, Guy," she raced home in the snow to wrap her gift with wallpaper.

Guy walks in soon afterward and doesn't recognize her at first because her hair is cut. He is astonished that she would cut her hair but understands the situation. The main reason Guy was so surprised was because of his gift to her, which was a set of combs made from pure tortoise shell with jeweled rims. She had wanted these combs for years and is delighted to have them. Madge then gives the gold watch chain to Guy. He then tells her that he sold the watch so that way he could buy Madge's combs. The story ends with them leaving together, more in love than ever.

Whit explains that although neither of them expected such generous gifts, they were both willing to sacrifice to give a special gift to the other. That is what real giving is about.