Wa `alaykum as-salamu wa rahmatullahi wa barakatuh.
Dear brother in Islam, we are really impressed by your question, which shows how concerned you are about the affairs of your fellow Muslims and your interest to abide by the Shari`ah in all details of your life. May Allah help us all lead a righteous life based on Islam!
Before answering your question, it is very important to note that Islam is a complete way of life and it suffices Muslims. At the same time, we should be interactive and proactive. We should not forget our role in the society. We should be a good example to others. Islam urges us to be kind with all people without any kind of discrimination due to differences in faith or race.
Muslims have their own identity. In order to keep this identity, Muslim scholars said that Muslims must not celebrate Christmas or holidays of non-Muslims. By participation in Christmas, it is possible that slowly one may lose his or her consciousness of this basic point of difference between Islam and Christianity. Muslims must be very careful in this matter. The greatest danger is for our next generation, who may slowly lose their Islamic faith in tawhid and may start believing in Jesus as “more than a prophet and servant of Allah”.
We should tell our children that we are Muslims and this is not our holiday. This is the holiday of our Christian neighbors and friends.
In response to the question you posed, Dr. Muzammil H. Siddiqi, former President of the Islamic Society of North America, states:
Allah Almighty knows best.