Zakat on Crypto: How to Calculate It?

Cryptoassets like Bitcoin, Ethereum and Solana have become a common component of many peoples investment portfolios in this quickly evolving digital age. But in addition to managing our money sensibly Muslims must also make sure that it is purified through zakat in compliance with Islamic law. Lets talk more about this. What is the crypto zakat ruling and how do we calculate it?

Zakat: What is it?

One of the cornerstones of Islam is zakat which is required of all Muslims who fulfill the requirements. Giving a percentage of one’s wealth to people who qualify (mustahiq) under particular guidelines is known as zakat. Zakat is meant to help those in need and to purify wealth and the soul.

Although they have different emphasis different schools of thought (mazhabs) have similar definitions for zakat. For instance according to the Hanafi school zakat is the act of giving ownership of a certain amount of wealth to particular people chosen by Shariah for Allah (ﷻ). In the meantime the Maliki school places emphasis on the act of donating a certain amount of wealth that has been owned for a full lunar year (haul) and has reached the nisab (minimum threshold).

What are Cryptoassets?

Digital assets that are issued via blockchain networks and cryptographic procedures are known as cryptoassets. They are decentralized which means a central authority such as a government or bank does not control them. It can represents different things like access to certain network or services, securities, or even real world assets like property. Cryptocurrencies like Ethereum, Bitcoin and USDT are a few well-known examples.

Also read:How to Manage Personal Finances of the Prophet Muhammad’s Companions

Dalil for the Zakat Obligation

As stated by Allah (ﷻ) in the Quran:

Take a sadaqah(zakat) of their wealth to help them get clean and pure with it. (The Quran At-Taubah: 103).

Furthermore according to the Prophet Muhammad ﷺ :

Islam is built around five(things): the belief that Allah is the only (rightful) god and Muhammad is the Messenger of Allah, the salah, the payment of zakat, the Hajj (the pilgrimage to the Kaaba) and the fasting of Ramadan(Narrated by Muslim and Al-Bukhari).

These proofs make it abundantly evident that zakat is a duty that no Muslim who has access to sufficient wealth should disregard.

Zakat for Cryptoassets

Zakat on cryptocurrency can be separated into two primary categories:

1. For Trading (Trade Goods): Cryptocurrency assets are regarded as trade goods if they are acquired for trading. 2,5% of the cryptocurrency assets value once they reach the nisab and haul is used to calculate zakat to be paid from those cryptoassets.

2. For Long Term Investment: Zakat is determined according to the kind of asset if cryptocurrency assets are bought for extended investment. For instance if the cryptocurrency asset is a stablecoin (ex. USDT) the zakat of it is calculated from 2.5% of the coin’s value . In the event that the cryptocurrency asset is a utility token (ex. Ethereum) whose benefits do not qualify as zakatable wealth, it is exempt from zakat. And if a Crypoasset represents tokenized real-world assets, it’s Zakat is determined using the underlying asset.

Also read:Zakat: Is It Better to Distribute It Yourself or Through an Organization?

How Zakat is Calculated on Crypto:

Zakat on cryptocurrency must be calculated taking into account the following factors:

1. Nisab: 85 grams of gold worth of total assets including crypto. Zakat becomes required if total wealth including cryptocurrency assets reaches or surpasses the nisab.

2. Haul: refers to the ownership period of one lunar(hijriah) year. Zakat has to be paid if the cryptocurrency assets have been owned for a full lunar year and satisfy the nisab.

3. Zakat Calculation Formula: 2.5% of total wealth including cryptocurrency assets is used to calculate zakat.

An example of calculating zakat on Cryptoassets

Ahmad possesses the following assets for instance:

The sum of Ahmads wealth is: 150 + 300 + 100 + 10 + 10 = 470 million.

The amount owed for zakat is: 470 x 2,5%= 11.75 million.

Also read:The Eight Categories of Asnaf: Who Qualifies for Zakat Distribution? 

In conclusion

Every Muslim who owns cryptocurrency assets that satisfy the requirements of nisab and haul is required to pay zakat. We can make sure that our wealth is blessed and purified by knowing the different kinds of cryptocurrency assets and how to compute zakat. I hope this article is helpful and enables us all to correctly fulfill our zakat obligations.

Zakat on Crypto: How to Calculate It?

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References:

  1. Islamic Finance Guru. (n.d.). Calculate zakat on crypto (Bitcoin & cryptocurrency). Retrieved from https://www.islamicfinanceguru.com/articles/calculate-zakat-on-crypto-bitcoin-cryptocurrency
  2. The Giving Block. (n.d.). How you can give zakat in cryptocurrency. Retrieved from https://thegivingblock.com/resources/how-you-can-give-zakat-in-cryptocurrency/
  3. Zakat Foundation of America. (n.d.). Calculate zakat on cryptocurrency. Retrieved from https://www.zakat.org/calculate-zakat-cryptocurrency
  4. Shariyah Review Bureau. (2023). Crypto assets: Zakat of the digital world. Retrieved from https://shariyah.net/wp-content/uploads/2023/05/Crypto-Assets-Zakat-of-the-Digital-World.pdf
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