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Opinions about Zakat on Stock Holdings

Opinions about Zakat on Stock Holdings

By Dr. Ahmed Badreldin | August 08, 2019

Contents

  1. Introduction
  2. Minimum Requirements for computing the Zakat Base (Nisab and Hawl)
  3. The Zakat Rate
  4. Basis for Zakat Opinions on Stocks
  5. Opinions regarding Zakat for Stocks

5.1.   Opinion 1: Stocks treated like Traded Goods & Merchandise OR Partnership Shares

5.2.   Opinion 2: Stocks treated like Agricultural Land

5.3.   Opinion 3: Stocks treated like Fixed Assets (that do not grow)

5.4.   Other opinions

  1. A Note about Online Zakat Calculators
  2. Treatment of Debt & Mortgages when it comes to the Zakat Base?
  3. Conclusion

 

Brief Summary

Here is a brief summary of the most commonly found opinions:

  1. The first opinion uses a Zakat Rate of 2.5% but differentiates stocks with regards to the intention behind investing:
  • if the intention behind purchasing them is to resell them is to treat stocks like Traded Goods & Merchandise: Capital invested is valued at market price and the entire amount enters the Zakat Base. [straight forward method, but may force investors to sell assets to cover Zakat]
  • If the intention behind purchasing them is to hold them to gain dividends and not immediately resell them, then they are treated like Partnership Shares: The Zakat Base depends on the company’s assets and its Zakat due. [complicated method, which requires accounting knowledge]
  1. The second opinion is to treat stocks like agricultural land:
  • Only profits generated from owned stocks enters the Zakat Base (like a harvest from land), however is treated to a Zakat Rate of 10%. [simple method, does not require capital invested to enter the Zakat Base unless the stocks are sold – uses a higher Zakat Rate]
  1. The third opinion is to treat stocks like assets that do not grow:
  • Only profits generated from owned stocks enters the Zakat Base, and these are treated to a Zakat Rate of 2.5%. [simple method, does not require capital invested to enter the Zakat Base unless the stocks are sold – uses a lower Zakat Rate] 
  1. Introduction

One topic that is commonly discussed within Islamic Finance and among Muslims in general is Alms Giving or the payment of Zakat. In this article, I do not discuss the origin of Zakat, its types, the level of its obligation, the necessity behind it, its effects on society nor its payment targets, but rather I focus only on how Zakat on equity assets (stocks) should be computed.

There are many official Fiqh sources that discuss the issue, but they are inconsistent. If one simply runs an internet search on the issue of “Zakat on Stocks”, one can obtain various interpretations that may be practically miles apart in their application, whether regarding:

  • Zakat rate: the percentage of the wealth to be given out, or
  • Zakat base: how to quantify the amount of money upon which to compute Zakat.

These different opinions can become very confusing when computing the Zakat due.

I do not intend to debate which of the opinions is correct or not, for Fiqh allows for differences in opinion and interpretation. However, I do intend to provide an overview of the different opinions, and highlight how each specific opinion seems to have originated, and how easy or difficult its application may be for an ordinary stockholder with little or no financial experience, but who still wishes to pay Zakat due. 

  1. Minimum Requirements for computing the Zakat Base (Nisab and Hawl)

One issue, which is agreed upon by scholars, is that not all Wealth is subject to Zakat, but only the amount that surpasses the minimum requirement (Nisab). The value of Nisab is set as a specific amount of Gold/Silver or its equivalent value in local currency. As soon as a person owns more wealth than the Nisab value, Zakat is due on the entire wealth available. Zakat is due on an annual basis[1] (Hawl), with the exception of land crops, where Zakat is due at every harvest.

In addition to Nisab, any wealth that is determined to be part of the essential needs of a person is not considered part of the Zakat Base. Although this may appear subjective, scholars have set a clear criterion, namely the “growth and income generation” of assets.  If one owns a house for personal use, this asset does not generate income in its current form, and is therefore not part of the Zakat Base. 

  1. The Zakat Rate

The Zakat rate to be levied on capital in its different forms is 2.5% annually. Other rates exist for land crops depending on whether the land is irrigated naturally (through rain), in this case, 10% is due from the harvest. Or whether land is irrigated artificially, then only 5% is due from the harvest. Although the rates for land do not seem relevant to this discussion, they do feature in one opinion pertaining to stocks, which is why I chose to mention them here explicitly. Other rates exist for other forms of wealth such as livestock but are not relevant for this discussion. 

  1. Basis for Zakat Opinions on Stocks

It is important to note that no clear ruling on stocks was given in the primary or secondary sources of Islamic law; it is therefore a contemporary issue that has been decided upon based on logic and reasoning within the guidelines of Islamic law. Since no legal ruling for stocks themselves exists, scholars attempt to bring stocks closer to objects that were available in earlier Islamic times. The available objects are:

  1. Agricultural Land
  2. Fixed Assets (that do not grow)
  3. Traded Goods and Merchandise 
  4. Partnership Shares
  5. Opinions regarding Zakat for Stocks

At this stage, I simply run a search on Google for “Zakat on Stocks”[2] to analyze what some stockholders may find online. I summarize the results obtained to show the different opinions. 

  • Opinion 1: Stocks treated like Traded Goods & Merchandise OR Partnership Shares

“With respect to stocks, if one purchased it for resale, it is deemed trade merchandise and hence zakat is due on it every year based on its market value that year. If purchased not for resale but rather to receive annual dividends, then the stock itself is not deemed an article of merchandise. Rather, one is deemed a co-owner of the company, based on one’s respective share. In that case, one pays zakat on all goods and monetary assets of the company, yet may deduct those assets that are not zakatable, i.e., company assets for use and not for sale, such as land, machinery, cars and the like.”

By looking at this first opinion, one can immediately see that even within one opinion, there are two different interpretations, depending on the “intention” behind the purchase of the stock. If the intention of buying the stocks was to resell them, the scholar finds this closest to buying merchandise, which you put on a shelf at your store, and hope that you will be able to sell it at an amount above its cost. I summarize this opinion in the following table:

Stocks with intention to Resell

Treatment as Merchandise

If sold within the year with profit

No Zakat is due on the stocks since they are not available at the end of the year, but the profits available are appended to one’s wealth, which eventually forms the Zakat base.

If sold within the year with loss

No Zakat is due on the stocks since they are not available at the end of the year, but the losses available are appended to one’s wealth, which eventually forms the Zakat base.

If not sold within the year

The stocks are valued at their Market Value at the end of the due year, and this is amount is appended to one’s wealth, which eventually forms the Zakat base.

Stocks with NO intention to Resell

Treatment as Partnership Shares

If not sold within the year

The value of the stocks themselves is ignored and does not contribute to the overall wealth of the person.

Instead, the person must consider him/herself as part of the company (owning a share of the company itself including all its assets and liabilities), in this case, Zakat must be calculated on the company’s Zakat Base, and the person must calculate the respective share of Zakat that falls upon his/her shoulders from the company’s due Zakat.

If nevertheless sold within the year with profit

No Zakat is due on the stocks since they are not available at the end of the year, but the profits available are appended to one’s wealth, which eventually forms the Zakat base.

If nevertheless sold within the year with loss

No Zakat is due on the stocks since they are not available at the end of the year, but the losses available are appended to one’s wealth, which eventually forms the Zakat base.

 

Let me begin by commenting on the first case “Stocks with intention to Resell”: One can comprehend the idea that stocks that are bought for speculation purposes are not bought in their form as partnership shares, but rather simply as commodities to be bought cheap and sold expensive to create a profit. However, the idea that the entire stock holdings must be valued at their market value may create a burden on the owners of the stocks that may force them to sell some stocks at a loss.

Let me illustrate this further with the following example: If one has purchased stocks worth $100,000 with the intention to resell them, but has not sold them for one year, and their current market value at the end of the year is $90,000. Based on the above opinion, the person must now pay 2.5% of the Zakat base of $90,000 (Market Value of the stocks at the end of the year) = $2,250. If the person does not have this amount of cash ready, some stocks must be sold (perhaps at a loss) in order to make this amount available. However based on this opinion, that would be the correct procedure for Zakat payment.

As for the second case “Stocks with NO intention to Resell”. This “intention” is meant as a general term but does not exclude the fact that one may reconsider and sell the stocks if one needs the money or determines the stocks to be a bad investment. What counts in this Fiqh ruling is the intention at the date and time of purchase of the stocks. This is sometimes seen as a loophole that is only closed by the honesty of intentions of the person, and cannot be judged by external parties.

In this case, the person does not need to value the stocks at the end of the year, however an even larger burden exists compared to the case above, since it necessitates that one have a (high) degree of accounting knowledge to be able to navigate the company’s financial statements and determine what their Zakat Base would be to calculate his/her share of the Zakat due[3]. If one owns stocks in many companies (or through a fund), this task becomes herculean and impossible for a common investor.[4] 

  • Opinion 2: Stocks treated like Agricultural Land[5]

This minority opinion attempts to make the accounting burden easier, and suggests simply to consider a stock like land crops, in the sense that one is investing their money as if one is investing in land, and the Zakat Base is the harvested amount, namely the profits received. This Zakat Base is then subject to the Zakat Rate on harvests, namely 10% (since the method of irrigation does not play a role, the 5% Zakat Rate does not become relevant[6]). The capital amount invested is no longer part of the Zakat Base, but only the “harvest”, i.e., only the profits form the Zakat Base immediately at the time of receiving the profits (even if more than once per year).

This method seems to be much easier than the previous opinion in terms of calculation of the Zakat Base (with a reduced burden since the capital invested is not considered part of the Zakat Base). It does however ignore the institutional feature of stocks as equity, and looks at them as an investment in agriculture with little or no effort on the part of the stockholder. 

  • Opinion 3: Stocks treated like Fixed Assets (that do not grow)[7]

I could only find this opinion on an Arabic website. The opinion seems at first similar to the first opinion since it also differentiates between intentions to resell. In other words: If the intention of buying the stocks was to resell them, the scholar finds this closest to buying merchandise, which you put on a shelf at your store, and hope that you will be able to sell it at an amount above its cost (identical to the first opinion). However, if the intention is not to resell, the Zakat Base becomes only the profits received from the dividends of the stock, and even these are only relevant after these profits have been in the possession of the stockholder for one year.

(This is considerable different compared to the first opinion where if the intention was not to resell, the value of the stocks themselves was ignored and the person considered him/herself as part of the company (owning a share of the company itself including all its assets and liabilities), in this case, Zakat must be calculated on the company’s Zakat Base, and the person must calculate the respective share of Zakat that falls upon his/her shoulders from the company’s due Zakat.)

Example: A person owns $100,000 worth of stocks, and received dividends of $5,000. No Zakat is due on this amount until one year passes after having received the $5,000 (and only if they are not reinvested or spent).

The argument behind this opinion stems from treating stocks neither as agricultural land, nor as merchandise, but as fixed assets (that do not grow) such as the treatment in real-estate bought for renting out. In this case, the capital invested is considered a fixed asset, which is not part of the Zakat Base, and only the income generated from the asset is relevant, in terms of being added to one’s wealth, and then entering the Zakat Base. This is the most lenient treatment of Zakat for Stocks since neither the capital nor the immediate profits are part of the Zakat Base, but only after one year of storing the profits. This opinion may encourage reinvestment or immediate spending of the profits, thus reducing Zakat payments. 

  • Other opinions

This opinion is based on the Egyptian Ifta’a Authority (search result 8) and is found on other websites as well (search result 7). It states that one must differentiate between the type of company the stocks belong to. According to search result 8: Only companies that are engaging in commercial trading activities are subject to Zakat. Companies that engage in industrial activities, services or production are not subject to Zakat. The Zakat Base is based on the Market Value of the stocks at the end of the year with no reference to the intention of reselling as a basis for calculation.

Search result 8 goes further into types of companies, including those engaged in agriculture. However, they do not allow any cases to be completely not subject to Zakat, but instead modify the assets that are considered part of the Zakat Base or the Zakat Rate or Nisab (in the case of agriculture for example). 

  1. A Note about Online Zakat Calculators[8]:

These online Zakat calculators appear to save the person time and effort, however they do not delve into any details, instead, they automatically assume that stocks are bought with the intention of trade, and therefore their Market Value is the Zakat Base (even though they do not instruct as to whether one should input the market value or book value (purchase value) of the stocks). They apply a 2.5% Zakat Rate to the amount. 

  1. Addendum: Treatment of Debt & Mortgages[9] when it comes to the Zakat Base?

The treatment for debt is best illustrated by the following example: If a person has $100,000 of savings beyond the Nisab, and has a Mortgage on a house for a total of $250,000, which is paid at a rate of $12,000 per year.

  • Opinion 1: Short-term Debt reduces Zakat Base

Islamic Accounting Standards (AAOIFI FAS No. 9) considers debt that is due in more than one year not be deducted from a person’s Zakat base. This person, based on the accounting standards above, should deduct $12,000 (since these are the amount due within one year) from the available $100,000 = $88,000 and consider these the Zakat Base.

  • Opinion 2: All Debt reduces Zakat Base

Another scholarly opinion states that all debt is to be deducted from a person’s Zakat base, therefore the same person, based on this second opinion, would deduct $250,000 from the available $100,000 = - $150,000. Since this is a negative figure, it does not fulfill the requirements (Nisab) for levying Zakat and this person has a Zakat Base of $0, i.e., is not required to pay any Zakat for the current year. 

  1. Conclusion

I hope this collection of opinions aids in understanding where the different interpretations come from and encourage further debate by scholars and academics about these issues to possibly ease the burden on stockholders who would like to pay their Zakat on stocks.

 

 

 

 

 

 

 

Appendix: Search Results for “Zakat on Stocks” that were used as a basis for the above opinions:

A detailed overview in English for other types of Assets (other than stocks) can be found here:

https://www.hidaya.org/publications/zakat-information/

 

[1] In Islamic Law, the Lunar Calendar is the basis of the annual computation.

[2] A list of the results I obtained from the search are available at the end of the article.

[3] To determine the Zakat Base, one must consider the company’s cash + receivables + inventories of goods in process. These act as the Zakat Base, upon which 2.5% should be levied, and the person must then calculate how much their share of this Zakat should be (based on how many stocks they own from the entire company).

[4] Exceptions exist in countries where accounting standards include Zakat, in that case one can simply read off the Zakat due of the company and calculate one’s share – assuming the company has not already paid the Zakat due directly and therefore the investor has no more obligation to do so since Zakat is not to be paid twice on the same asset within the same year.

[5] Minority opinion – found in search result number 5, 3rd point on that website.

[6] One may very well argue here that an actively managed portfolio is similar to artificial irrigation since it incurs more costs (more transactions costs or simply management fees), however Islamic scholars have not addressed this issue and remain by the 10% rate.

[7] Search result 12 – Arabic only.

[8] Links for two calculators are given in search results 10 & 11.

[9] I do not delve into the Islamic opinions regarding debt forms or mortgages, but rather focus on the core action of how debt should be treated.


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