A gift given at a gift exchange, usually around Christmas time that is given strictly for comedic effect, to piss off the receiver, or both.
Extra joy can be achieved if given to a teacher, boss or someone in authority, although remorse almost inevitably follows.
Gag gifts come in wide varieties, as nobody has the same taste in humor (or despair).
I reached into the box expecting a great gift from my best friend, but then realized it was a gag gift when I learned he had given me a bar of soap.
A fur coat is the ultimate gag gift for a PETA advocate.