Zakat on investment portfolio

Investment Questions and Chats Property
#1

I have been reading a lot about zakat and shares. It is a topic with no clear answer, but your view (on this site) on it is the most logical.

When i buy shares, i plan to keep them for a long term, to increase my capital, and then sell (dividend only investors possess the same benefit, whether they intent or not). According to many scholars, this qualifies my shares as tradeable goods and i should pay 2.5% on the market value.

This seems illogical as: 1. goods for trade are not kept for long term, but are sold as soon as they can possibly sell
2. Fluctuations in share price can be extreme
3. No monetary gain is realized until shares are sold
4. The entire market value is not all of your’s to keep, and capital gains tax must be paid on it, and thus you are paying zakat on money you won’t have.

It seems scholars miss all of these points. Their opinion on market value zakat is only logical if you partake in constant trading (multiple times in a year).

Their view is also unjust. If i were to buy a house and rent it out, i only pay zakat on rental income profit. However, the price of land and the home can appreciate, like a share, and can be sold at a future date. Why should that person not have to pay zakat on what is basically their net worth, but i must, especially when many of my shares do not offer a dividend, so i am in a worse position than the other (no additional monthly income).

The law should be just for all. If i am expected to pay zakat on my net worth, so should everyone else. Why should a man with 100 million dollars worth of rental property pay 0 zakat on the value of his properties, but i must pay zakat on my shares?

It is logical that even investors only interested in dividends are also interested in the share price, and can one day sell for a profit without paying zakat on the market value for all previous years.
But i, keeping shares for many years, have to pay zakat on it because i eventually intend to sell? Is your long term investment view incumbent upon receiving a dividend?

Lastly, can you provide the evidence for you conclusion on paying zakat as part owner, as opposed to market value, this way i can discuss with a local scholar?

I feel like the market value approach is an old and misunderstood approach to zakat, given by scholars who lacked proper financial understanding.

Thank you

#3

Wasalam

May Allah bless you.

Follow you heart.

And Allah knows best!

#4

Dear Toff,

I feel as if you misunderstood the point of my post. The point was not that I am looking for ways to avoid zakat, rather, it was to have a logical discussion on the rulings passed down by scholars.

I have been paying zakat as 2.5% on the whole as a matter of safety. However, as I reiterate, I wanted to have a scholarly discussion on this matter, and view the evidence on both sides. There was no “unnecessary waffling,” as I was presenting viewpoints for discussion.

The reason was this is not to avoid paying zakat, but, to correct what may be incorrect or a misunderstanding, so we can arrive to the truth and do things the right way. The matter can be quite complicated, and my only purpose is to learn the truth. This is why I asked for evidence on this matter.

If I continue to pay 2.5% on the market value of the shares, now the question arises: If I must pay 15% tax at the time of sale, do I deduct that, even though I do not plan on selling this year?

Secondly, under this viewpoint, say you have $100,000 invested, and over a period of 10 years, the portfolio value does not change much, and in the meantime 2.5% a year zakat over that same period results in a deduction of $22,000 of your portfolio, simply due to zakat. This is a likely scenario, as the market is unpredictable, and there are many cases of people making no gains for many years (or worse, suffering losses). In order for your investment portfolio to suffer no losses (not even accounting for inflation), you would need a minimum gain of 2.5% a year (plus additional amount to cover the tax burden for the gains, once sold)

This same issue, when it comes to rental properties, exists. However, the majority of scholars have the opposite view. This is because if you buy a home as an investment, paid in cash, and you decide to rent it out, you will only pay zakat on the net income on the rental property, and you still hold the right to sale and benefit from the appreciation of property value.

This is how the situation would play out in my area if the same logic of stocks is applied to properties:
You will have a $12,000 annual property tax burden on a $500,000 home.
You will be able to rent the home for at most, $3,000 per month, for a total of $36,000 per year.
This leaves $24,000 net profit. Assume an average tax rate of 33%, you are left with $16,000 yearly, some of which will have to be set aside for eventual repairs.

Now, if the same logic is followed, and you must pay 2.5% of $500,000 in zakat, because a second house is too a tradeable item, your zakat burden will be $12,500 dollars. This leaves you with $3,500 yearly profit - a very large difference. Scholars have recognized this is a burden, which is why the majority do not expect you to pay zakat on the value of an investment home. But my question is: is this the right way? Does this avoidance lead to the establishment of a landlord class, which then holds too much power over the renters? This is absolutely what we see in our society today. In my area, up to 70% of your paycheck can go to rent disposal.

My question is, why differentiate between investing in a company versus investing in property? Where is the evidence for that? How did scholars arrive at this conclusion?

This brings forth the case that zakat must be paid on all assets that are not for personal use and are in excess (extra homes, extra cars, etc.), as true justice requires the law should be the same for everyone - Why must a stock investor and store owner/trader pay zakat on his goods, but a multi-billionaire landlord pays nothing on his assets? The majority opinion on stocks vs real estate is contradictory - as shown in my examples above. The only way the opinion on stocks is logical would be when applied to people who are constantly trading, and not for people that intended to keep their portfolio for 10+ years, as was my intention with buying.

Islam is a religion of reason, logic, and truth - this is what I am after.

Thank you.

2 Likes
#5

I agree with the OP and I was wondering if anyone had a response to it.

#6

For long term stocks, NZF has suggested to use a 25% proxy value when calculating net value of your stocks for zakat purposes

If you own stocks, shares and/or private equity investments, Zakat is due on these investments. If you plan to resell shares, Zakat is payable, at their current value. If you purchase shares as long-term investments for dividend income, you may pay Zakat using a standard rate of 25%. Calculate 25% of the current market value of your portfolio
https://nzf.org.uk/how-do-you-work-out-zakat-on-stocks-and-shares

And here’s the research behind this proxy calculation
https://nzf.org.uk/news/zakat-on-share-investments-determining-a-proxy-for-calculation/