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Every winter, Hogwarts students return home and celebrate Christmas with their families. However, given their extensive use of magic, it does not seem likely they'd understand Christianity the way muggles would.
How and why do wizards observe Christmas?
Many people (or Muggles, in this case) who generally do not believe in the supernatural or in anything of that sort still believe in God and Jesus. Why would wizards/witches be any different? They may see Jesus as a wizard, and his powers might seem similar to those of a wizard on the surface, but that does not necessarily mean that he is not the son of God or that he was a prophet. Wizards can celebrate Christmas for the same reasons as muggles.
I believe that most every culture in the world has been shown to celebrate this day. In history, cultures that believed in magic, like the Celts, also celebrated a holiday with themes similar to Christmas. The holiday celebrated by various cultures was a celebration of the time when the Sun being out will begin taking up more and more of the day. Since it's historically been observed by most every culture, there's no reason that wizards wouldn't also celebrate it, regardless that they called it christmas instead of Yule.
Additionally, from a sociological perspective, they inherited their culture from muggles and generally people stick to what they were raised with.
In my opinion, its to ensure that the muggles and the wizards have their schedule in sync to prevent any curiosity between muggle and wizard.
For instance, if a neighbor sees that another neighbor's kid doesn't have a winter vacation, questions will pop up. Investigations and the works, until the Wizards are exposed.
So basically its just make the kids seem normal to the muggle world.
The fact that wizards do things that once were being considered diabolic by the Catholic Church does not necessarily mean that they do not believe in God.
We can see cases that wizard priests appear in the books (e.g. the pastor at Dumbledore's funeral, the priest that married Bill and Fleur), and are very alike to the ones that British and the American people are used to in their everyday lifes. That logically points to that wizards also believe in Jesus, or in some variation of Him and the three predominant christianic dogmas (Western Catholic, Eastern Orthodox and British).
Although that celebrating Christmas in order to be "in-sync" with the Muggles is a good point, there's no sense in exchanging gifts, decorating trees and having dinners just for suspision avoidance.
Maybe there is a part of the British Church that operates in the wizard community secretly and their hypothetical change of heart to the beliefs and the condemns of the Dark Ages' "Witch Hunt" can be paralleled to the modernization that happened on the sexual direction of the priests (gay marriage, homosexual priests etc) that once were considered deadly sins and sicknesses.
Assuming that the stories told about Jesus in the Bible are accurate, Jesus may have been a wizard. There is good reason that he would have been revered among wizards, because he did things that none of them could do. For example:
While performing magic in front of muggles is frowned of today, that wouldn't have been taboo in Jesus's day, because the International Statute of Wizarding Secrecy wasn't adopted until 1692.
Perhaps they are celebrating Yule, which is what the Christmas holiday is based off of. Yule is a celebration of winter solstice and would seem like a natural fit for witches and wizards to celebrate.
Perhaps the wizarding community adopted the name of Christmas as it seemed less conspicuous to muggles (even though Yule is now a recognized holiday) when they went through a Christianization. We don't actually see anything about what wizards/witches do on Christmas other than have a tree inside their house (a Yule tradition) and exchanging of gifts. We aren't given other clues as to any rituals or spiritual traditions that would say if they are Christian or not.
I believe it is similar to the real world, where (at least in Europe) people who are not very religious still celebrate Christmas to some degree.
As other people mentioned, in the ancient times people celebrated the winter solstice and later Christmas was established by Christianity. In the XX century people in western Europe became less and less religious, some calling themselves atheists or agnostics, some just didn't visit church too often. But still these people followed some Christmas traditions like decorating a Christmas tree, singing carols, giving themselves gifts or having a festive meal. We still can find some Christmas decorations in public places like shopping malls and radio stations keep playing themed songs. We can tell that Christmas has become a secular holiday for the whole societies: for some people it has a religious dimensions, some people are just having some rest and fun.
The religion is never mentioned across Harry Potter books, but it doesn't imply that magic society is 100% atheist. It is possible that some of the wizards are religious, but it is not explicitly shown in the canon. Most of them may just follow the tradition and enjoy the occasion to spend some time with family. Probably there are some wizards who don't celebrate Christmas at all (I can't imagine Voldemort singing carols or preparing a pudding).
As for Hogwarts, it seems that Christmas is a good opportunity to have a longer break, allowing students and teachers to visit their families they don't see for most of the year and to have some rest in the middle of a school year. It is also an occasion to have some social integration for the lonely employees and students staying at Hogwarts, satisfying their emotional need for belongingness, providing some substitute of the family.
