It should be made clear that ill-gotten money is not subject to Zakah because such money must be returned in full to its legal owners. “Zakah must be paid on assets that are lawfully owned. Zakah cannot be calculated on prohibited or unlawful wealth, such as income from interest, stolen property, or wealth acquired or earned through unlawful means. Such kinds of wealth must be returned in full to its lawful owners. Unlawful wealth cannot be transformed into lawful wealth by paying Zakah on it, nor does one obtain any reward for giving all of it away to the poor. The Prophet (peace and blessings be upon him) said, “He who acquires wealth by forbidden means, then gives it away as a charity gets no reward; the sins remain on him.” (Reported by ibn Khuzaymah)
In another hadith, the Prophet (peace and blessings be upon him) said, “By Him in Whose Hand is my soul, no servant earns wealth unlawfully and gives it away in charity except that it is rejected; or spends it except that it is not blessed; or leaves it behind his back [after he dies] except that it is his means to the Fire. Allah does not erase evil with evil but rather He removes evil with good. A corrupt deed does not clear away another corrupt deed.” (Reported by Ahmad)