Zakat on your investments

Calculating zakat gets confusing once your money is spread across savings, stocks, retirement accounts and property. This guide draws on our zakat session for investors with Shaykh Umer Khan, our Shariah advisor. Scholars differ on some details, so where it matters, ask a scholar you trust.

The basics

Zakat is a required share of wealth, 2.5%, given each year to the people the Qur'an names (9:60). It's separate from sadaqah, which is voluntary.

Who owes it: a Muslim whose wealth has stayed at or above the nisab for one lunar year. Shaykh Umer uses the gold standard: the value of 85 grams of gold, which changes with the gold price.
When: one lunar year after you first reached nisab, then on the same Islamic date every year. It doesn't have to be in Ramadan.
On what: what you own on that date. Not your income, and not an average over the year.

One test: working or idle?

Shaykh Umer sorts every asset two ways: personal or business, and productive or idle.

Productive wealth is in use, creating goods, services, homes or jobs. It owes no zakat.
Idle wealth is sitting still: cash, gold, things held only to rise in value. It owes 2.5% a year.

What decides it is what you're doing with something, not whether you could sell it. You could sell your car tomorrow, but you use it, so it's not zakatable.

That's the point of zakat on wealth: idle money shrinks by 2.5% a year, so it pushes money into use.

Asset by asset

Cash: checking, savings, cash at home and uninvested cash in brokerage accounts. 2.5% of the total.
Your home, car, furniture and clothes: no zakat.
Rental property: no zakat on the property itself. The rent you've collected counts once it's in your bank account on your zakat date.
Land or homes bought to resell: 2.5% of market value. Land you're building your own home on owes nothing, but you have to pick one intention.
Stocks you trade: treat them like inventory, 2.5% of their full value.
Stocks you hold long term: you own part of a business, so you pay only on your share of its cash, receivables and inventory, not its buildings and equipment. Zoya's zakat calculator does this for you.
401(k) and IRA: treated like stocks, and due every year, not just at retirement. Unvested amounts owe nothing. You can pay from other money; Roth contributions can also be withdrawn.
Private businesses and funds: pay on the business's or fund's cash, receivables and inventory, not its fixed assets.
Crypto: a store of value, so 2.5% of its full value.
Gold and silver: coins, bars and gold or silver funds owe 2.5% of full value. Jewellery you wear owes none in the view of most of the Shafi'i, Maliki and Hanbali schools; the Hanafi school holds that worn gold and silver are zakatable too.
Watches, art and collectibles: none if you bought them to use, zakat if you bought them to rise in value. Go by your main intention.
Money owed to you: counts if you expect it back.
Debts you owe: subtract what's due in the next 30 days, not your whole mortgage or long-term loan.

Working it out

On your zakat date, add up your idle wealth.
Subtract debts due in the next 30 days.
If what's left is below the nisab, you owe nothing. Otherwise, multiply by 2.5%.

You can pay on the date or earlier, including spreading it out ahead of time. You can give appreciated shares instead of cash, which may also save tax if you itemize.

Purifying investment income

Most scholars allow investing in companies that earn a small share of their income, up to about 5%, from haram sources. That share of your dividends and gains should be given away. This applies inside retirement accounts too.

Compare investments after zakat

When you compare two investments, look at what you keep after fees, purification, zakat and taxes, not the headline return. Money working in a halal, productive investment generally owes less zakat than the same money sitting idle.

For the principles behind all of this, see Islamic principles of wealth.