Assalamu ‘Alaikum,

I explained my understanding of how to pay zakat on crypto.

We mentioned the conditions for owing zakat which is that the wealth has to be: 

1. Under your full ownership
2. Not being used or consumed 
3. Reached the limit of nissab (minimum amount you need to have in order to owe zakat which for currency type assets is 85 grams of Gold, 595 grams of Silver).
4. and your wealth has to have met the Nissab for at least 1 lunar year without interruption, known in Arabic as “al-Hawl”.

We also mentioned that the Zakat owed on assets that are similar to Gold and Silver is 2.5%, as per the authenticated hadith.

However, we didn’t go into much detail about how, is the different approaches to calculating zakat. And I found three different approaches which I found to be legitimate. Different respectable commentaries supported different approaches and I would like to cover these approaches.

It’s really important that the topic of Al-Zakat is well understood by all Muslims.The word “Al-Zakat” was mentioned in the Holy Quran 30 times and in 27 of those 30 times, it was mentioned alongside Salat (prayer) in the same verse which logically signifies general closeness in importance between zakat and salat.

Yet if you ask the average Muslim what they know about Zakat they’ll likely give you a very limited, wanting answer whereas their knowledge of Salat is typically quite good.

This shouldn’t be the case.

This will focus on zakat on liquid assets such as precious metals, traditional currency, and cryptocurrency which is 2.5% as we mentioned since this is by far the most common zakat owed by the most number of Muslims.

The first step in calculating zakat on liquid assets is, to sum up, all your accounts which hold these types of zakatable assets.

If you look at each account in isolation, your zakat obligations may be distorted by transfers between these accounts.

So you have to look at the sum of the balances in these accounts in total.

As was rightly pointed out by a comment on my previous video.

let’s say you have two accounts, Account A and Account B.

The sum of your holdings in both accounts is $1 million throughout the year.

Once a year you transfer everything in account A to account B, so account A has a balance of $0 and account B has $1 million. Then you transfer everything in account B to account A so account B now has $0 and account A has $1 million.

If you’re looking at these accounts in isolation to determine whether you’ve had the nissab continuously without interruption for the last lunar year, you’ll end up owing $0 in Zakat since each of your accounts had a balance of zero at least one point during the last year.

So instead, you would add the balances of account A and account B over the past year and would figure out if you had nissab continuously that way.

There are some really useful apps that will help you see all your accounts in one place such as Truebill, which I’m a big fan of not only for seeing your financial net worth over time but also to keep track of your subscriptions, expenses, and income in a glance, the affiliate link to this free service is in the description.

The second point I want to bring up is that which relates to debt.

The general principle with regards to debt as it relates to zakat is that it lowers your calculation of zakatable assets.

So going back to our example, you have a total of $1million in zakatable assets, but you have half a million in debt due in 1 month.

You would take this half a million that is about to become due and subtract it from your zakatable assets and pay zakat on the result.

So $1 million in liquid assets - $0.5 million in debt = $0.5 million in zakatable assets. This is what you pay zakat on.

However, this subtraction is only valid for debts that are due within the next 12 months.

If you have a 30-year mortgage of $10 million, you’re not going to subtract the entire balance of $10 million loan from your assets until it is paid off.

What you do is you subtract the sum total of the minimum payments that are due in the next lunar year from your assets and you pay zakat on the balance.

So let’s say the minimum payment on the loan is $50,000 per month. Over the next lunar year this comes to $50,000 X 12 X 97% = $582,000

Subtract this from the 1 million in assets you have, so you pay zakat on:

$1,000,000 - $582,000 = $418,000

Now let’s level set before we go any further.

So far we’ve said the following:

1- To calculate zakat you want to calculate the sum of all zakatable assets in all accounts. Use an app like Truebill to make things easier.

2- Deduct from this sum of your assets only the debt that is going to come due in the next lunar year.

After steps 1 and 2 you’ll have a number which we’ll call, your net zakatable worth.

Pretty easy right?

Now let’s move on to the question of when to pay zakat.

This question is not as easy as may seem at first glance since what if you had $10,000 which reached the age of 1 lunar year in Ramadan for instance, but the very next month, you have another $15,000 that also reached the age of 1 lunar year and you haven’t paid zakat on.

The first approach is to pay zakat on your highest balance during the past lunar year, once a year.

When you pay on your highest balance you ensure that no zakat will come due for the next lunar year no matter what. 

Even if your highest balance from last year becomes the lowest balance for the next twelve months, you still won’t owe zakat during the next lunar year since you have already paid it. 

Put differently, there is no possibility that an amount of money will reach the age of 1 lunar year in the next twelve months which you haven’t already paid zakat on. 

This approach may be burdensome for some people, since the highest balance may be very different than the balance they normally carry in their accounts.

The second approach is to pay zakat on the lowest balance of the past lunar year but to pay it multiple times per year.

Using the minimum balance method, you would look at the minimum balance on the sum of all zakatable accounts.

The caveat to this method is that in order to never be late on your zakat, you would have to basically calculate zakat daily.

This is obviously something that is quite burdensome and I don’t think this type of burden is consistent with the spirit of Zakat or Islam generally for that matter.

Even every week is burdensome. Every month, however, if you have things connected the right way, you have a spreadsheet for example, or are using an app with all your accounts connected to it, and all you have to do is take a number from that app, multiply by 2.5% (the amount of zakat) and you’ll know if you owe anything in Zakat, doing that once a month seems reasonable.

If you would like this spreadsheet wherein I breakdown all three approaches, leave your email in the link included in the description and I’ll send it to you insha’ Allah.

The third approach to doing this is what used to happen during the time of the prophet Muhammad peace be upon him wherein once a year the state would take 2.5% of the person’s current wealth at the same time every year.

Using this method, sometimes you will overpay when the balance on zakat day turns out to be greater than the highest minimum balance for the next twelve months. Other times you will underpay when the balance on the day you pay zakat is less than the highest minimum balance for the next twelve months.

However, the Law of averages suggests although sometimes you would overpay and sometimes you’ll underpay, if you use this same method every year, over time you’ll probably end up paying right around what you needed to pay.

Now if you commit to this method, you have to keep in mind that if you get a huge windfall right before the day you pay zakat every year, you have to pay zakat on this amount even though you’ve only had it for a few days.

This is because in other years, you may experience a substantial decline in zakatable assets right before your zakat payment date and in which case you would pay zakat on this lower balance.

What I don’t think is right is for you to flip flop between this approach and the other approaches I mentioned from year to year.

if you commit to this method, then stick with it because as I mentioned, we’re relying on the law of averages to bring your payment amount to what you actually owed.

If every time you get a windfall of income before the zakat date, you decide to switch to the minimum balance method, and then when your wealth is conveniently low you choose this method, the law of averages is not going to work and you’ll end up underpaying over your lifetime.

Also since you are at liberty to choose the date you decide to pay zakat on if you’re in a state that doesn’t collect zakat itself, you should choose a time of the year when you suspect your net zakatable worth will be close its average, not one where you know it will be much below it.

Also, choose a very easy date to remember.

The Prophet Muhammad (SAW) first collected Zakat on the first day of Muharram. Basically, the first day of the Hijri year.

To summarize:

• When calculating zakat, regardless of method, do not look at accounts in isolation. Instead, you have to look at the aggregate of all accounts which hold assets that you must pay 2.5% on.
• Paying zakat on the minimum balance over the past lunar year only once a year is not sufficient.
• Either pay on the highest balance to be absolutely sure for the next twelve months that you don’t owe any zakat. OR
• Pay on the minimum balance but then recalculate your obligations periodically, I suggest once a month. OR
• Make your zakat calculation based on your current balance on the same day every year

If you’d like the spreadsheet wherein I layout these methods with formulas for you to use, then leave your email in the link in the description and I will send it to you.

Until next time take care of yourself. Assalamu ‘alaikum and peace be upon you all.