Zakat on Crypto: A Practical Guide | Musaffa Academy

In 2009, Bitcoin became the first crypto currency in history. Since then crypto currencies have created a new category of wealth which was not known by classical Islamic scholarship. Today millions of Muslim investors all over the world hold Bitcoin, Ethereum, stablecoins and a host of other digital assets. The issue of zakat on crypto currencies is therefore no longer theoretical, but a practical obligation for which we need a practical solution.

There is a ton of confusion about crypto because people tend to think of it as one thing. But holding Bitcoin in a wallet is very different than running a leveraged futures position on an exchange. Earning staking rewards is very different than speculating on price. Each of these activities has a unique financial structure that scholars treat differently. This post is a guide to what usually counts for zakat, what doesn’t usually count, and how to calculate the amount of zakat that is due.

Is Cryptocurrency Zakatable? The Scholarly Consensus

Increasingly there is consensus amongst modern scholars that cryptocurrency that is held as an investment will be subject to zakat. The consensus is that cryptocurrency held for investment purposes will fall under the category of māl (weal-th), and is therefore subject to zakat. This ruling has been adopted by AAOIFI and a number of national Shariah boards in Malaysia, the Gulf and South Asia.

Our previous stance regarding the basis for including crypto assets in the definition of zakatable wealth was as follows: Shariah principle holds that if a commodity/asset was already considered in the era of the Prophet (blessings and peace be upon him), then whatever the new commodity/asset may be, if it has a monetary value, can be sold and purchased in the market, and is held as a store of value or for profit, then it will remain subject to zakat, irrespective of whether it was known or introduced in modern times. This principle still stands.

The easier, more superficial questions are often answered by a simple “yes” or “no”. However, the more nuanced questions — and these are precisely the ones where genuine scholarly disagreements arise — relate to the more intricate crypto activities such as staking, lending, derivatives or leveraged positions. These activities have to be examined on a case by case basis.

Spot Holdings: Bitcoin, Ethereum, and Other Directly Owned Crypto

Anyone who owns cryptocurrency such as Bitcoin or Ethereum in a wallet or on an exchange, free and clear of any debt or leverage, owes zakat on those spot holdings. It is treated the same way as cash, bonds or stocks. So on the zakat anniversary date one simply calculates the total market value of the holdings in the local currency and pays 2.5% if the amount exceeds the niṣāb threshold.

The price to use is the spot price of the asset on your zakat date — the price on that date, not the price you paid for it, or any average of prices, or any estimated future price. Your assets are worth this amount at this instant in time, and that is what counts. Crypto markets are very volatile, and prices can change enormously over a period of months. Again, this is no reason to avoid calculating zakat, because the date of your zakat falls due is the date of reference for the value of your assets.

Worked Example: Spot Crypto Holdings

This year your Zakat anniversary date is: Calculate the amount of cryptocurrencies you have on this date: * 0.15 BTC at $62,000 = $9,300 * 2.5 ETH at $3,200 = $8,000 * Stablecoins – $4,500 In total, you have $21,800 of cryptocurrency wealth combining them all together. Adding your savings – $8,000 – your total Zakatable assets amount to: $29,800 Zakat will then be: 2.5% of $29,800 = $745

Zakat on Stablecoins

Stablecoins or a stable coin, refers to a class of digital tokens that are pegged or fixed to a certain value of a sovereign currency; such as, USDT, USDC, or DAI. From zakat perspective they are just like the digital cash, and if you have the stablecoins on the day of zakat they have to be considered as part of your cash or highly liquid assets. Their zakat value is equivalent to the face value and hence similar to the other types of cash or liquid assets, and as dollar pegged stablecoin is worth $1 for zakat calculation.

Stablecoins become more complicated when we consider them in the context of being deposited into yield generating protocols, and thus being lent out in exchange for gain. As we discussed earlier, there is a difference of opinion among scholars with regards to riba. If you are unsure about the permissibility of a particular stablecoin yield product, it is more important to consider that first. Once you have determined that the product is permissibility, you should consider the stablecoin to be the value of the zakatable asset, and the gains from it as income, which would then be considered part of your zakatable cash.

Zakat on Staking Rewards

Staking is a process that involves locking a certain amount of cryptocurrency in a wallet in order to act as validator for all transactions on a proof-of-stake blockchain. Staking is currently one of the primary income streams for long-term holders of cryptocurrencies.

Most modern scholars treat staking rewards as income. Income can be thought of as rental income or profit from a business. It is therefore not thought to involve the riba element and is treated in the same way as any other income in respect of zakat. So the staking rewards would be part of your wealth that you have on the day of your zakat anniversary and hence part of your total wealth to be declared.

Taking a more practical view of this, the current value of all staking rewards, which are now considered earnings, would generally need to be included in your crypto holdings for zakat to be worked out on your anniversary date. However, if these earnings were already spent or exchanged to a different cryptocurrency before your zakat date, you no longer have them. So they cannot be included for zakat purposes. The fact that these earnings are sitting in your digital wallet or on an exchange will not change the fact that they are currently non-sharable assets (i.e. not cash and therefore considered part of your crypto holdings) at their current market value for zakat purposes.

When we talk about zakatable assets, we mean the underlying staked principal which is the tokens that you have locked up in order to stake them. Even though they’re locked, they’re still yours and will be returned to you when you want them. The majority of scholars agree that locked or staked assets are still considered assets that you have access to and should therefore be included in your Zakat calculation at their market value.

Worked Example: Staking

You have 5,000 tokens staked. Your zakat date tokens are worth $1.20 each. Market value of the staked principal $6,000. You have also earned 320 staking rewards tokens over the year, worth $384 at the $1.20 market rate. Total zakatable value from staking $6,384. This will be added to any other zakatable assets you hold and Zakat will be calculated at 2.5% of the total.

Futures and Leveraged Positions: Why These Usually Don’t Count

That’s where things change and where the title’s distinction between what counts and what usually doesn’t becomes significant.

A common misconception we keep seeing with crypto investors is the belief that someone holding crypto futures contracts or a leveraged trading position have the same exposure as someone with spot ownership of crypto assets. They do not. In the case of a crypto futures contract, this individual does not have the underlying crypto asset and is simply holding a contract that’s value is derived from the underlying crypto assets price. Similarly, when an individual holds a leveraged position, they are risking their own capital – and in many cases also risking capital that they did not originally have, in the form of the borrowed funds used to increase the leverage of their position.

Shariah considerations on crypto derivatives The sale of non-existent existing commodities and derivatives which has two aspects 1) Firstly futures and derivatives on cryptocurrencies will involve the selling and buying of assets which are not owned in the same manner as classical Islamic Finance prohibition of sale of non-existent existing commodities as has been identified in the case of synthetic gold ETFs. 2) Secondly the leverage or margin that is needed for derivatives involves the borrowing of money at interest which is Shariah prohibited as riba. Most Islamic scholars are of the opinion that the futures and derivatives and swaps and options are categorically prohibited and zakat cannot be levied on the non existent asset positions of the derivatives.

If the transaction in the form of an instrument is impermissible, then the issue of Zakat becomes secondary to the main issue, which is to get out of the transaction and to refer the issue to the scholars. And if the scholar permits the holding of the structured transaction in a particular form, then he must be requested to specify the ruling on Zakat in respect of that transaction.

For those in such roles and have not yet determined the permissibility of the position, the conservative default would be to consider the net accessible value of the position (i.e. the amount you could withdraw if you were to close it out today) as part of your overall zakatable assets. This is not an endorsement of the underlying position, but rather an attempt to avoid missing the zakat on these assets while the permissibility of holding them is being determined.

NFTs and Other Digital Assets

Non-fungible tokens (NFTs) and other unique digital assets occupy a more ambiguous space. The test for zakat remains the same as for any other asset, being whether it has been acquired as part of the trader’s inventory with the intention of resale for gain, or for use as a personal asset.

If you have NFTs which you have bought with the intention of reselling them, (i.e. they are like a form of digital trade good), then they are zakatable at their market value on your zakat date. The same principles that apply to business inventory apply to NFTs. If you have bought some NFTs which you like and intend to keep them, in the same way as a work of digital art which you display on your computer, or collectibles you have no intention of selling, it is harder to classify. The majority of scholars would apply the exemption for personal use in the same way that they do for the exemption for worn jewellery.

Practically speaking, valuing NFTs can be quite challenging. Unlike fungible assets such as cryptocurrencies that have established market values, the value of a non-fungible token can be highly illiquid and highly speculative. If an NFT has a verified floor price on a market that is actively trading, then that can serve as a basis for its value. If there is no buyer in the market for the NFT at a meaningful price then there may be no zakatable value to consider.

Using a Crypto Zakat Calculator

A crypto zakat calculator can greatly simplify the menial task of gathering the prices of cryptocurrencies on your zakat date in the event you have a large number of cryptocurrencies across several locations, i.e. wallets and exchanges. These calculators usually ask for your assets, gather market prices, calculate the niṣāb threshold and yield your zakat amount. Such tools assist greatly in helping you become more organised and efficient.

Unfortunately a calculator will not be able to give you the final word on what is halal and what is haram when it comes to staking, or whether participation in a DeFi platform constitutes riba or how to treat a complex structured crypto product. These types of determinations require a highly knowledgeable and competent scholar to assess. A crypto zakat calculator can make the calculation much easier once you have determined which category the calculation falls into, and thus should not be used in place of the initial determination.

Make sure your calculator is using your actual zakat anniversary date for the prices and is not using today’s date or an average. The snapshot principle, that you have what you hold at the time you have it and it is valued at what it is worth at that time, is the principle that underlies zakat calculations.

Click here for Musaffa Zakat Calculator

Quick Reference: Zakat Treatment by Crypto Activity

The Bottom Line

Zakat on crypto follows the same principles as zakat on any other asset. If you own it, it has some value and one lunar year or 2.5% applies. The challenge with crypto is the identification of the assets.

Spot holdings and stablecoins are the most clear cut cases. Staking rewards are increasingly considered as income and thus included in zakat calculations. For futures, leverage and other DeFi activities that are not directly related to zakat, there are various permissibility issues that would be better discussed with a more knowledgeable scholar who is familiar with both Islamic finance as well as the underlying structures of these products.

A quick Zakat guide for crypto asset holders by Ali Chanji From 2nd September 2017 onwards every individual who holds cryptocurrencies, will have to adhere to Islamic principles in relation to their assets as Zakat is applicable on them as well. So the following tip is relevant to all crypto asset holders. On your Zakat anniversary date, take a recent and clear photograph of all your crypto assets holdings. Be truthful to yourself in terms of categorising every position following the guide provided above. Sum the total Zakat values of your assets and combine them with other values of your wealth, and pay on the amount which is above the nisab with an annual rate of 2.5%. *Note: if you are in two minds as to whether or not to consider a certain asset, we recommend to the safe side to count it. This practice is part of fulfilling an act of worship of Zakat. Your intention is for the right cause so having doubts as to whether an asset should or should not be counted will not matter.

And Allah knows best.

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