How to Calculate Zakat on Stocks & Investments

In Islam, Zakat is more than a form of charity, it is a way of giving back. It’s a way of purifying your money, whether it’s money, gold, stocks, or both.

So, what’s the zakat for stocks and shares? And how do you figure it out? Let’s find out!

What is Shares?

Basically, stocks and shares are two different things. ‘Stock’ means you own one or more companies, while ‘Share’ means you own a portion of the company’s assets.

Stocks and shares are both financial assets that become mandatory when you meet certain conditions. They may overlap, but they really mean the same thing.

Zakat is the amount of money you have to pay when your assets reach the nisab, which is the amount of wealth you have to own before you have to pay it.

The approved nisab for most assets is 87.48 g of gold held for a full year.

Shares In Islam

Let’s take a look at what Muslim scholars said to answer this question. They said that the halal or non-halal status of a company’s shares is determined by what the company does.

For example, if the company makes or sells alcohol or pork, offers gambling or promiscuity, or deals in riba or interest-based contracts, then it’s not halal to buy its shares.

But if the company doesn’t do any of these things, then it’s halal. So, basically, if a company does something that’s not halal, you can’t buy their shares.

How to Calculate Zakat Using Shares?

Drawing on the fatwas of Muslim scholars, there are three main ways to determine the zakat value. These are:

1. the market value approach

2. the zakatable asset approach

3. the 25% approach

Before going into each of these approaches, it is important to note that the purpose of the investment is a key factor in calculating the zakat of shares.

If you are looking to buy shares with the intention of making a quick profit, then the market value approach is the way to go.

On the other hand, if you are looking to hold shares for the long-term (and maybe sell them later when you make a bigger profit), then you will need to choose one of these approaches.

You may also want to consult a knowledgeable scholar to discuss your situation and which approach to take.

The Market Value Approach

It’s pretty straightforward. Just treat your portfolio’s total value the same as cash. That’s 2.5%.

You should also keep in mind that you’re paying out zakat based on your total shares’ current value in the market, not the original value at which you bought them.

For instance, if you’ve invested $10k in shares and they’re currently worth $15k, you’d be paying $375, or 2.5%.

The Zakatable Asset Approach

If you’re looking to invest in stocks for the long haul, you can use the company’s zakatable assets as a benchmark instead of the share price.

To do this, you’ll need to look at the company’s liquid assets, which you can do by looking at its most recent financial statements. Generally, companies have assets that can be turned into cash quickly, such as:

Currency or cash.
Money in a bank account.
Money market accounts.
Treasury bills (bonds, notes..).
Certificate of deposits.
Account receivables.
Prepaid expense.
Mutual fund investments.
Stock market investments.

The 25% Approach

If you don’t want to know the exact amount of zakatable assets in your company, you can go with the 25% approach. This is the same as the previous approach, except you can figure out how much of the company’s assets are actually zakatable.

For example, if you have $15,000 worth of shares, you can work out how much of that is zakatable and how much is not. The zakatable amount is $3,750 if you subtract 2.5%.

So, if you subtract $15,000 from the company’s shares, the zakat amount would be $93,75. This approach has been backed up by lots of experts and charities who have looked at different funds.

Zakat On Stocks

Basically, the same rules apply to zakat on stocks as they do for shares. It all depends on what you had in mind when you bought the stock – was it a short-term trade or was it for a long-term gain?

In short, you should treat short-term stocks like cash, paying 2.5% as zakat (principal plus profit).

On the other hand, if you’re looking to invest in stocks for the long term, there are a lot of different ways to go about it, depending on what you read in the fatwas.

You could use the following methods: 2.5% zakatable assets, 2.5% profit, or 10% profit.

For every year that you owe Zakat, take 2.5% from the total wealth you had at the end of that year and pay that in Zakat. If you are not sure how much wealth you had, you must estimate it to the best of your ability.

Zakat on stocks is an important financial obligation in the context of Islam. It’s based on the principles of charity, fairness, and purification of wealth.

It’s a way for Muslims to show their support for the community and those who need it. The way you calculate it, whether it’s based on the market value, Zakatable Assets, or using the 25% method, is in line with what Islamic scholars teach.

They take into account the purpose of the investment and what the company does. By doing this, Muslims can show their support for financial fairness and social well-being, which is in line with the main principles of Islam.