Cryptocurrencies like Bitcoin and Ethereum have completely transformed the financial landscape of this digital age. Now that many Muslims are asking whether they should pay zakat on their bitcoin as more and more people invest digitally, this article will discuss the Islamic understanding of zakat with respect to cryptocurrency while also including an easy calculator.
What is Zakat
Zakat is an obligation to give a portion of your wealth in charity and is part of The Five Pillars of Islam. It requires Muslims to give part of their wealth (usually assessed at 2.5 percent per annum) to the needy however, there are several conditions which has to be rectified before zakat is due:
Nisab: The bare minimum of wealth required prior to zakat becoming mandatory.
Hawl: The lunar year during which the wealth is held.
Ownership: The individual must be the owner of the wealth.
Do You Pay Zakat on Cryptocurrency?
There has been debate among experts on whether or not cryptocurrencies are allowed in Islam. Yet, a large number of modern academics and Islamic financial organizations have acknowledged cryptocurrencies as valid assets, categorizing them as “al-Mal Mutaqawwim” (valuable wealth) in accordance with Shariah law. If they fulfill the requirements, this classification subjects them to zakat.
Read Also: Is Cryptocurrency halal or haram in Islam
How to Calculate Zakat on Cryptocurrency?
There are multiple procedures involved in calculating zakat on cryptocurrencies:
Find out the Nisab: Traditionally, the value of 85 grams of gold is used to calculate the nisab for zakat. For example, if gold is currently worth $60 per gram, the nisab would be:
85 grams × 60 $ per gram = 5,100$
Determine the Worth of Your Cryptocurrency Assets:
Determine how much your whole bitcoin holdings are worth at the current market price.
Subtract Liabilities: To calculate your net assets, deduct any outstanding obligations from the total amount of cryptocurrencies you own.
Use the Zakat Rate: To calculate the amount of zakat owed, multiply your net assets by 2.5% (0.025).
Zakat=Net Assets×0.025
For example, if your net cryptocurrency holdings amount to $10,000, your zakat would be:
10,000×0.025=250$
Particular Points to Remember
Staking and Yield Farming: Staking and yield farming earnings are taxable as income and are liable to zakat.
Lost Access: Zakat is not due until you get back into your cryptocurrency if you have lost it (for example, because you forgot your private keys).
Non-Fungible Tokens (NFTs): Unless they are held for resale, in which case they are considered trade assets, NFTs are often exempt from zakat.
In conclusion
Zakat payments made with cryptocurrencies are in line with Islamic law, which guarantees that money stays in the community and helps those in need. The implementation of Islamic financial duties changes along with the financial environment. To fulfill this crucial obligation, Muslims who own cryptocurrency should evaluate their holdings once a year, seek advice from informed academics, or use trustworthy zakat calculators.
