Am I obligated to pay the Islamic tax on my crypto and Bitcoin holdings?
With the Muslim holy month of Ramadan approaching, I thought it would be a good opportunity to examine if Zakat (almsgiving) should be paid, especially during Ramadan, a month dedicated to praying, fasting, and charitable giving by over 1.6 billion Muslims worldwide.
Zakat is a socio-religious tax that is obligatory for every Muslim who holds wealth above a certain level in a lunar year. Millions of Muslims around the world have a tendency to adjust their Zakat payments during the holy month of Ramadan when every good deed’s reward is multiplied many folds not only in quantity, but in quality too.
I’m fairly active in my social circle which has a very pro-stance on digital coins, and numerous people have contacted me this last week, asking specifically about the validity and calculation of Zakat on cryptocurrency.
Disclaimer: I am no scholar or authority on Islam and its religious law. There are different takes on Zakat and you might not agree with my opinion. I have used the most widely accepted interpretation of Zakat and applied these to modern cryptocurrencies. If you believe there is a different stance on cryptocurrencies in Islam, please let us know.
The word Zakat literally translates into something that purifies. One of the Five Pillars of Islam, it is an obligatory tax that is meant to spiritually clean a Muslim’s assets and at the same time, create a wealth flow that cascades down to the poor and needy. There are different percentages of Zakat, depending on the wealth type. Cryptocurrencies, whether considered as money or digital gold/asset, are liable to be taxed at 1/40th (or 2.5%) of their value.
The Zakat calculation was very straightforward a few years ago, but crypto has come a long way since then and the rise of different kinds of tokens has created complications in addressing this simple equation. Fortunately, there still exists an easy way to determine whether Zakat should be implemented or not:
Cryptocurrencies created as digital alternatives of money and currencies, such as Bitcoin, come under Zakat.
Tokens specifically created by platforms such as exchanges that offer discounts on fees are basically tokens that replace the use of another cryptocurrency and hence, come under Zakat.
Though each of these tokens has a different classification, their Zakat qualification is determined by the owner’s intent. These tokens represent your stake in a platform or a firm, even allowing you a voice in the decisions as a shareholder. If bought for the purpose to have ownership in a business and take profits/dividends, then there is no Zakat liable on the tokens, but on the profits saved over the course of the lunar year. You will need to pay Zakat on the total value if you buy with the intent of selling them at profits later on.
Once again, Zakat is determined by your intent of purchasing. However, the underlying asset also comes into play. Properties such as art, land, buildings, and vehicles are exempt from Zakat if bought for use. Like security and tokens, any savings done from profits made is Zakat taxable. Buying as an investment, however, means Zakat on the total value plus profits held for one year.
Cryptocurrencies, though more than a decade old, are still an emerging class and different scholars have different takes on them. The more you dive into these, the more complex it becomes. If in doubt on whether your crypto assets come under Zakat or not, take the precautionary route and pay it.
Verily, Allah knows best, and may He forgive our oversights.