While you can of course still buy physical Xbox and Windows Store gift cards, Microsoft is now offering a digital version for Windows Phone 8.1-wielding gift-givers. The Microsoft Digital Gift Cards app lets you give the gift of apps, games, music, movies, and TV shows at the Xbox, Windows and Windows Phone stores, for the holiday season and beyond.
Microsoft currently offers separate Xbox gift cards and Windows Store gift cards in physical form in retail stores like Best Buy and of course online via Amazon and elsewhere. This may not be obvious, but these cards are identical and work across all of Microsoft's online stores, which are of course exactly the same store under the covers and always have been. So if you buy, say, an Xbox gift card, you can use the value of that card to buy a game for Windows Phone, an app for Windows 8.x, music from Xbox Music, and so on. They work everywhere because the value of the card is applied as a credit to your Microsoft account.
Physical gift cards will likely always have their place, because people like to have something to slip into a card or package to give as a gift. But this new electronic option has its place as well, and I'm surprised it's only available on Windows Phone (and Windows Phone 8.1 only, at that): There should be a version of this app on Windows 8.x, and on Android and iOS too.
Anyway, the current apps works as you would expect, and is basically a short wizard. First, you select a card theme—Christmas, Holidays, Hanukkah, Birthday, whatever—and then select a card design from within that theme.
From there, you choose the amount—from a list of amounts that ranges from $10 to $100—and the recipient (via your contacts list in People) and add an optional note, and then specify a payment method that is associated with your Microsoft account.
As the sender, you will receive an email confirmation of the gift card, and the app also presents a history of your gift card purchases. The receiver of the gift card will get an email with a code that can be redeemed in a variety of places, including the Windows Store app in Windows (Account, My Account) and online via the Microsoft web site.
The beauty of the cards, digital or physical, is that the value they contain works across all of Microsoft's online stores. So you can use this value to purchase apps or games (Windows Store, Windows Phone Store, Xbox Store), music (Xbox Music), and movies and TV shows (Xbox Video). There's no expiration date for the gift, and Microsoft lets digital gift card buyers cancel their purchase for up to 14 days, or until the card is redeemed, whichever comes first.