Is Zakat Payable on Cryptocurrencies?
Answered by Shaykh Muhammad Carr
Question
What is the ruling on paying zakat on cryptocurrency, such as Bitcoin or Ethereum? If I have not paid zakat on my crypto holdings since acquiring them, have I sinned, and is my wealth halal?
ِAnswer
In the Name of Allah, the Most Merciful and Compassionate.
I pray you are in good faith and health. Thank you for your question.
Paying zakat on cryptocurrency is obligatory (wajib). Allah says, “Accept charity offerings from their wealth cleansing and making them grow thereby to full purity in faith and deed.” [Quran, 9:103]. However, not all crypto holdings/assets are necessarily subject to zakat.
If cryptocurrency is successfully interpreted as serving a purpose beyond being a medium of exchange, zakat will depend on the function it assumes.
It is essential to pay your zakat promptly. Although delaying payment may have been an error, it does not render the cryptocurrency in your possession haram.
What is Cryptocurrency
- Cryptocurrency is a crypto asset whose primary function is to serve as a medium of exchange. The FCA refers to it as, “exchange tokens”.
- Crypto-assets can be defined as, “digital representations of value that use cryptographic techniques.”
The Purpose of Cryptocurrency
- Cryptocurrency is a decentralized, digital alternative to conventional currencies, enabling peer-to-peer transactions without intermediaries like banks or governments.
- Blockchain is the underlying technology that powers cryptocurrency. It is a distributed ledger or database maintained across a network of computers.
Terminology
Cryptocurrency is a type of crypto asset. The two terms are not always interchangeable because these digital assets serve many functions. Zakat is dependent on the functionality of the asset.
Crypto Assets
Crypto-assets can be divided into the following types:
1. Cryptocurrencies/currency coins/tokens/transactional tokens – e.g., Bitcoin, Litecoin, and Dash are examples of cryptocurrencies and currency tokens since their primary utility is to serve as a medium of exchange and transfer value. FCA calls these “exchange tokens”.
2. Security tokens – PwC defines security tokens as “digital tokens based on blockchain technology that are similar in nature to traditional securities. They can provide an economic stake in a legal entity: sometimes a right to receive cash or another financial asset, which might be discretionary or mandatory; sometimes the ability to vote in company decisions and/or a residual interest in the entity.
3. Utility tokens – provide users with access to a product or service and derive their value from that right.
4. Asset-backed tokens – According to PwC, an asset-backed token is “a digital token based on blockchain technology that signifies and derives its value from something that does not exist on the blockchain but instead is a representation of ownership of a physical asset (for example, natural resources such as gold or oil)”
5. Governance tokens – grant their holders governing rights on a protocol.
6. Platform tokens – Some industry experts have coined the term platform tokens for tokens used as fuel or gas on a network. [Crypto Assets, Zakat of the Digital World]
Jurisprudential Evaluation
Passing judgment on an issue requires a proper understanding and accurate conceptualization. Cryptocurrencies, being relatively complex, are subject to diverse interpretations regarding their essence and functionality. This naturally results in varying legal rulings.
In our understanding, cryptocurrency serves as a medium of exchange and is therefore zakatable. When it reaches the nisab (zakat threshold) and a lunar year passes, zakat is due.
As such, cryptocurrency is considered wealth, and Allah says, “Accept charity offerings from their wealth, cleansing and making them grow thereby to full purity in faith and deed; And pray for them: Verily your prayer is a great relief for them.” [Quran, 9:103]
Cryptocurrency is a nominal currency (naqd istilahi), meaning its value is derived from collective agreement rather than intrinsic worth. Typically, all nominal currencies have a prior function before being accepted as a medium of exchange. Imam Malik’s hypothetical example of leather being ‘minted’ clearly illustrates this concept.
If cryptocurrency is successfully interpreted as serving a purpose beyond being a medium of exchange, the obligation of zakat will depend on the specific function it assumes. Mufti Taqi, quoting the Shafi‘i School on nominal currency, states, “As for currencies by agreement like fulus, it can be employed as a currency or not.” [Taqi Uthmani, Fiqh al-Buyu‘]
All of the above is based on the assumption that cryptocurrency has achieved or will achieve widespread acceptance, a point that some scholars still dispute.
And with Allah alone is our success.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Muhammad Abu Bakr Badhib
Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door for students. As an imam, he has the unique opportunity to serve his community in daily life.
In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.
