Assalamu ‘alaikum,

There are 4 main conditions for an asset to be “zakatable”, meaning to owe zakat on it.

As we cover these 4 conditions we’ll figure out how to pay zakat on cryptocurrencies.

The first condition for an asset to be zakatable is that it should be considered Mal 

Mal is an Arabic word that refers to anything that a person can have exclusive ownership of and control over. 

Allah swt says: Take, [O, Muhammad], from their wealth a charity by which you purify them and cause them increase

Can you have exclusive ownership and control of cryptocurrency?

Yes you can.

The first condition for an asset to be  Zakatable is been met with cryptocurrencies.

The second condition is Alnama’ or growth

In the scholarship I’ve read about Zakat they like to divide assets to growth assets and non growth assets hence the name they gave this condition. 

However, I’d like to explain this point using my own method because I think it’s easier.

There are three possible uses for an asset. 

You either use it, consume it or you or trade it. 

If you are using or consuming the asset it is not zakatable.

If you are trading the assets or the asset is being groomed for trading such as livestock and crops than it is zakatable.

Let’s consider the example of a house to understand this point clearly.

My family and I are living in this house, therefore it is being used, therefore is not zakatable.

Assume next year I move out of this house and lease it to a tenant.

Is the house being used?

Yes it is, by the tenant, therefore it is still not zakatable.

The rent payments I’m collecting are Zakatable if they meet the rest of the conditions we’re going to mention but the asset generating the rent, namely the house, is not.

Now consider the year after that I get tired of being a landlord and I decide to sell the house, is the house still being used? 

No. Therefore, while the house is being offered for sale it is Zakatable.

So really assets in Islam are either being productive, providing a service or they are taxed with zakat.

This has the benefit of preventing hoarding which ultimately impoverishes society.

On the topic of zakat Allah swt explains…

...so that it will not be a perpetual distribution between the rich among you

Now that we insha’ Allah understand this point let’s talk about cryptocurrencies.

Cryptocurrencies are unique in that most have a dual nature.

They can act as useful assets providing an extremely wide range of possible utilities, from securing a network and increasing the reliability of its transactions to providing storage and computing power.

Following the same logic that we saw with the house example, and here I should mention that this is ijtihad on my part based on qiyas or reasoning by analogy, following this same logic cryptocurrencies which are providing a service are not zakatable while they are providing this service.

For example: You are staking a particular cryptocurrency and this staking process is providing storage capacity for the network its connecting to.

This staked cryptocurrency is in my opinion, not zakatable.

The reward or rent your cryptocurrency generates is zakatable but not the staked cryptocurrency itself that is providing the service.

Unstake this cryptocurrency and it becomes zakatable.

So the cryptocurrency you have which is being useful, and providing a service is not zakatable. 

The cryptocurrency which is just sitting in a brokerage account or crypto wallet, isn’t being used for anything, isn’t providing a service, you’re hoping is going to go up in price so you can sell for a profit, or at least maintain its purchasing power, this is zakatable.

So again, if the cryptocurrency is being used productively, not zakatable.

If it isn’t, and instead it is just sitting in savings or slated for trade, then it is zakatable.

My apologies, where are my manners, I haven’t yet introduced myself. if you're new here my name is Rakaan Kayali founder of practical Islamic finance dot com where we help people globally build wealth in a halal way. To follow my crypto and stock portfolios and access exclusive content, consider becoming a member link in the description and now the third condition for zakat is Meeting Nissab 

Nissab refers to the minimum amount you have to have in order to owe zakat and here I find the most appropriate measure to use for the Nissab of cryptocurrencies is the Nissab for Gold and Silver which is 85 grams for Gold or 595 grams of Silver.

As of the day of recording this, 85 grams of Gold trades for around $5,400 and 595 grams of Silver trades for $490.

Which standard should you use, Gold or Silver?

Well if using the Silver standard causes you to owe an amount that you need for essentials then use the Gold standard.

That said, If you have money needed for essentials parked in cryptocurrencies you are probably overinvested.

Cryptocurrencies are highly volatile and you really shouldn’t have needed money invested there.

Keep in mind, you pay zakat on the entire amount not just the amount above the nissab.

For example, let’s say you have $6,000 in Bitcoin that meets all the conditions for zakat, you’re using the Gold Standard for Nissab, you wouldn’t just pay zakat on $6,000 - $5,400 or $600 you would pay zakat on the entire amount of $6,000.

I should mention here that debt plays a role in determining whether or not you have nissab.

The basic principle is that debts are deducted from wealth, and if the remainder is still above the nisab threshold, zakat is payable, otherwise not. However, this is a lengthy topic and there are some details that need fleshing out which could get complicated so be sure to do your due diligence on this matter to figure out your exact obligation. 

The fourth condition for zakat is Hawl which basically refers to the time period which you had the wealth.

This condition is pretty easy to understand. Zakat on currency type assets, like cryptocurrency, becomes due when you’ve had them for 1 lunar year or 354 days.

The amount you’ve held continuously throughout the past year is your lowest balance.

So assuming your cryptocurrencies meets the conditions we’ve mentioned, how much zakat should you pay?

In the authenticated Hadith the Prophet (peace be upon him) used to take from every twenty dinars or more, half a dinar, and from forty dinars, one dinar.

Which comes out to 2.5% 

This is how I do it at least. Be sure to consult multiple sources and follow that which has the most supporting evidence for it.

If you want to see the cryptos I’m invested, and stocks, and access privileged content, make sure to become a PIF member.

Until next time take care of yourself.

Assalamu ‘alaikum and peace be upon you all.