Islam is a religion that has a contemporary renewable outlook with flexible principles in all aspects of life. One of the manifestations of that is zakat on cryptocurrency.
How is zakat calculated on cryptocurrency? And what are zakatable assets in cryptocurrency? This is what we will find out in this article.
Cryptocurrency and zakat
Zakat is a form of social justice that aims to distribute wealth in society so that it would not be a commodity restricted to rich people.
Also, the obligation to pay zakat is one of the five pillars of Islam.
Zakat is calculated at 2.5% from a specified value called nisab; the minimum amount of money that has been kept for a full lunar year or over so that it becomes zakatable.
All assets must be considered when calculating zakat. These assets could include the following:
- Money in bank accounts.
- Owed money.
- Precious metals (e.g. gold).
- Stocks and shares.
- Goods intended for sale, etc.
Since the obligation of zakat is related to finance, a sector that has seen many developments recently, new cases that require different applications of zakat have emerged.
The most recent of these cases is the application of zakat on cryptocurrency.
What is cryptocurrency?
It is a digital currency, created by using an encryption algorithm, and it depends on a digital payment system, apart from banks, to verify transactions.
Cryptocurrency depends on the blockchain system that enables anyone anywhere to use this currency to buy, sell, and transfer digital money.
Is zakat due on cryptocurrency?
In general, zakat on investment assets depend on the intent behind this investment. Is it for short-term or long-term phases?
According to Mufti Faraz Adam, who is a well-known UK-based Islamic Finance & FinTech consultant, “Any cryptocurrency or token purchased to resell will always be zakatable”.
Therefore, any crypto asset, if it’s purchased with the intention of earning profits and reselling it in the short-term, will be 100% zakatable, regardless of the type of capital.
On the other hand, the zakat orientation differs when not intended for resale and when it is held indefinitely.
So the key principle is; are you a trader or a long-term passive investor?
Zakat calculated on cryptocurrency
Zakat payment is calculated on cryptocurrency, the same way as it is calculated on money. In such a case, the zakatable rate on normal money is worth 2.5% after it reaches the nisab.
When your cryptocurrency value reaches the nisab, which is equal to 87.48 grams of gold following a lunar year; you are obliged to pay zakat.
For example, if your crypto savings for one lunar year (Hijri year) reaches or exceeds the nisab point, you can multiply its total amount by 2.5%, and the result will be the required zakat.
So if you own one Bitcoin worth $24,000 and your zakat payment date is today, it would be: $24,000 x 2.5% = $600.
Zakatable assets in cryptocurrency
With the advent of cryptocurrency, multiple forms of digital assets have been developed, which require knowing how to apply zakat to them.
When it comes to cryptocurrencies, Islamic scholars have different opinions based on the intent behind holding those currencies.
Is the intention of investing (long-term)?
Or for using it as a means of daily payment (short-term)?
Does cryptocurrency hold value and authority or not?
Here, the debate is different than whether using crypto is permissible (Halal) or impermissible (Haram) .
Typically, there is no disagreement in the case of long-term investment, as zakat will be paid on cryptocurrency of all kinds. In such a case, it is always 100% zakatable.
As for the short-term dealings with cryptocurrencies, there is a sort of disagreement.
Some Islamic opinions say that cryptocurrency zakat, for the short-term must be paid as it is an asset, and others say that there is no zakat on cryptocurrencies due to their regular circulation.
Value and authority
A third group of scholars adopted another approach toward cryptocurrency, believing that it is related to the type of currency itself.
If the currency is popular and has a huge authority (like Bitcoin and Ether); meaning it is a store of value and a means of circulation at the same time, then the intention behind carrying it is considered.
On the other hand, if it is not popular in daily payment and less used in transactions but still has authority, that means it is only a store of value and bears the intention of long-term investment, so it will be zakatable.
Of course, the safest path is just always to pay zakat regardless of the type of cryptocurrency.
Security tokens are peripheral devices used to gain access to an electronically restricted resource, and they represent a fraction of an underlying asset and are usually issued by a legal entity.
If security tokens are held for long-term investment, they will be zakatable, in which case their underlying assets (liquid assets, cash money, gold, etc.) will be considered.
Likewise, any held asset-based tokens will follow the same rules and will be zakatable based on their underlying assets.
This type of token is used in decentralized applications in the blockchain system and serves multiple purposes.
If platform tokens are purchased to use in a virtual world and not for resale, they are not eligible for zakat. However, if they are purchased with resale intent, then they are zakatable.
Governance tokens are types of cryptocurrencies that allow their holders to vote for blockchain’s internal policies.
In other words, governance tokens are used as a form of “political” capital that holders can use to influence decisions within the protocol or Decentralized Autonomous Organization (DAO).
In addition, your intention to acquire governance tokens plays a role in determining if it is zakatable or not.
According to Mufti Faraz Adam: “Zakat for tokens that are not purchased for resale depends on the token’s type and its representation.”
How do you share your Zakat?
You can share your ‘zakat on cryptocurrency’ with the poor and people in need via a non-profit organization or a charity in your local community.
In case you want to donate your zakat to people in need, like refugees, you can reach out to a reliable NGO like Bonyan, which uses the donations that it gets in the best way to assist refugees.
Do we pay zakat on cryptocurrencies?
Yes, we pay zakat on cryptocurrencies if they reach the nisab.
Can Muslims use crypto?
Islamic scholars have different opinions on this matter; while some of them ruled that they are permissible, others ruled that they are not.
How do I find out what kind of token/currency I have?
You can ask a financial technology advisor to find out what kind of token/currency you have.
Do you pay zakat on investment?
Yes, you pay zakat on investment if it is zakatable.
Is zakat applicable on gold coins?
Yes, zakat is applicable on gold coins when they reach the nisab.