Zakah on Employee Stock Options

The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.Question:: As a follow-up to Sarah's question on company granted stock options, I'd like to ask about the Zakat that is due on gains received via these options. In certain cases (as with some of the recent IPO's in the tech sector), the compensation achieved fromstock options can be huge -dwarfing the other benefits an employee receives (i.e.salary). According to at least one booklet I've read about Zakat calculation, the rateof Zakat is not a uniform 2.5% for every type of asset. In particular, the rate for awindfall is given to be 20%. Given this, would the gains from stock option salesbe considered a windfall and therefore be Zakatable at something other than 2.5% ? BTW,I realize that this is not strictly an Islamic investment question. However, it is onewhose answer would benefit many people here in the Silicon Valley.Answer: At the end of Section Three in Lesson Six, I spoke of the differences of opinion among contemporary scholars in regard to the calculation of Zakah on types of wealththat were unknown in the times of the classical jurists. While the debates of contemporaryscholars on these issues may be disconcerting to modern investors, it must be rememberedthat these issues are new and have yet to receive the attention from jurists that theydeserve. As the demand for solutions increases, so will the attention these issues receivefrom scholars. Now, with particular reference to the Zakah on gains realized through employee stockoptions, your observations are astute. It is true that the rate is not uniform for everyclass of asset. And, yes, it might be possible to identify the returns from such optionsas windfalls. Some modern scholars have characterized employee stock options as a form ofji`alah or reward for the completion of a specified task or services. As such, theywould not fall under the category of a windfall. Another group of contemporary scholars,however, insists that the rate on this type of wealth should equate to the rate onagricultural produce, where the land is exempted. Instead, their position is that Zakahmust be paid on the profits earned from one's holdings at the rate of 10% on the netprofits earned in a lunar year (or 10.3% per calendar year). Other scholars refine thisposition somewhat and draw a legal analogy from agricultural produce that has benefitedfrom irrigation, and for which the rate of Zakah is lower, or 5%. I said, in the lesson,that I would not indicate my own preference in these matters, partially at least for thereason that the debates have only just begun. But my advice to you is that you consultwith someone you trust who also has knowledge of the subject of Zakah, or with severalpeople, and then decide for yourself what is best. Ultimately, Allah will judge you onthe sincerity of your intentions.

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