DigitalOcean Holdings, Inc.DOCN
DigitalOcean Holdings, Inc. Income Taxes Disclosure
Income Taxes
Income before income taxes from U.S. and foreign operations is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| U.S. | $ | 196,847 | $ | 75,651 | $ | 174 | |||||||||||
| Foreign | 9,815 | 22,048 | 26,602 | ||||||||||||||
| Total income before income taxes | $ | 206,662 | $ | 97,699 | $ | 26,776 | |||||||||||
Total income tax benefit (expense) included in the consolidated statements of operations is comprised of the following:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | (13,711) | $ | (5,437) | $ | (829) | |||||||||||
| State | (1,368) | (1,786) | 99 | ||||||||||||||
| Foreign | (2,622) | (3,443) | (6,835) | ||||||||||||||
| Total current | $ | (17,701) | $ | (10,666) | $ | (7,565) | |||||||||||
| Deferred: | |||||||||||||||||
| Federal | $ | 61,761 | $ | (144) | $ | (140) | |||||||||||
| State | 7,929 | (1) | 120 | ||||||||||||||
| Foreign | 611 | (2,396) | 218 | ||||||||||||||
| Total deferred | 70,301 | (2,541) | 198 | ||||||||||||||
Income tax benefit (expense) | $ | 52,600 | $ | (13,207) | $ | (7,367) | |||||||||||
The Company has elected to prospectively adopt the guidance in ASU 2023-09. A reconciliation of the U.S. federal statutory rate of 21% to the Company’s effective tax rate for the year ended December 31, 2025 in accordance with the guidance in ASU 2023-09 is as follows:
| Year Ended December 31, 2025 | ||||||||||||||
| Amount | Percentage | |||||||||||||
U.S. federal statutory tax rate | $ | (43,399) | (21.00) | % | ||||||||||
State and local income tax, net of federal income tax effect(1) | 5,183 | 2.51 | % | |||||||||||
| Foreign tax effects | (105) | (0.05) | % | |||||||||||
| Effect of cross-border tax laws | ||||||||||||||
Foreign-derived intangible income deduction | 6,250 | 3.02 | % | |||||||||||
Other | (482) | (0.23) | % | |||||||||||
Tax credits | 445 | 0.22 | % | |||||||||||
| Changes in valuation allowances | 98,341 | 47.59 | % | |||||||||||
| Nontaxable or nondeductible items | ||||||||||||||
162(m) limitation | (4,161) | (2.01) | % | |||||||||||
Other non-taxable or non-deductible items | (494) | (0.24) | % | |||||||||||
Changes in unrecognized tax benefits | (9,754) | (4.72) | % | |||||||||||
| Other | 776 | 0.38 | % | |||||||||||
Total tax benefit | $ | 52,600 | 25.45 | % | ||||||||||
___________________
(1) Taxes in California, New York State and New York City make up the majority (more than 50 percent) of the tax effect in this category.
A reconciliation of the Company’s income tax expense at the U.S. federal statutory rate of 21% to the effective rate for the years ended December 31, 2024 and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09 is as follows:
| Year Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
Income tax benefit (expense) at federal statutory rate | $ | (20,517) | $ | (5,623) | ||||||||||
| State and local taxes, net of federal benefit | (1,412) | 2,509 | ||||||||||||
| Foreign tax rate differential | 3,858 | (1,030) | ||||||||||||
| Stock-based compensation deductions | 5,698 | 17,998 | ||||||||||||
| Nondeductible expenses | (2,206) | 14 | ||||||||||||
| Unrecognized tax positions | (4,360) | (1,083) | ||||||||||||
| Net change in valuation allowance | (44,559) | (138) | ||||||||||||
| Global intangible low-tax income | (110) | — | ||||||||||||
Foreign-derived intangible income deduction | 3,140 | 970 | ||||||||||||
| 162(m) limitation | (9,295) | (17,072) | ||||||||||||
| U.S. R&D tax credits | 3,402 | 2,810 | ||||||||||||
| Valuation allowance release related to acquisition | — | 1,074 | ||||||||||||
| Acquisition related compensation | (2,659) | (7,811) | ||||||||||||
Impact of intra-entity intellectual property rights transfer | 59,627 | — | ||||||||||||
| Other | (3,814) | 15 | ||||||||||||
Total income tax (expense) | $ | (13,207) | $ | (7,367) | ||||||||||
Income taxes paid (net of refunds received) for the year ended December 31, 2025 in accordance with the guidance in ASU 2023-09 are as follows:
| Federal | $ | 2,000 | ||||||
| State | 1,872 | |||||||
| Foreign | 2,410 | |||||||
| Total | $ | 6,282 | ||||||
Income taxes paid (net of refunds received) for the years ended December 31, 2024, and 2023 in accordance with the guidance prior to the adoption of ASU 2023-09 were $19,667 and $2,723, respectively.
The components of deferred tax assets and liabilities are as follows:
| December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Accounts receivable | $ | 1,334 | $ | 1,261 | |||||||
| Accrued expenses | 1,771 | 2,354 | |||||||||
| Capitalized research and development | 34,541 | 44,724 | |||||||||
| Operating lease liability | 62,689 | 32,398 | |||||||||
| Net operating loss carryforwards | 7,030 | 11,498 | |||||||||
| Stock-based compensation | 3,362 | 3,389 | |||||||||
| Tax credit carryforwards | 6,498 | 17,778 | |||||||||
| Depreciation and amortization | 10,788 | 18,538 | |||||||||
| Capped call | 17,445 | — | |||||||||
| Other | 2,365 | 2,593 | |||||||||
| Gross deferred tax assets | 147,823 | 134,533 | |||||||||
| Less: valuation allowance | — | (109,541) | |||||||||
| Total net deferred tax asset | $ | 147,823 | $ | 24,992 | |||||||
| Deferred tax liability | |||||||||||
| Operating lease ROU asset | $ | (61,605) | $ | (28,915) | |||||||
| Total deferred tax liability | (61,605) | (28,915) | |||||||||
Total net deferred tax asset (liability) | $ | 86,218 | $ | (3,923) | |||||||
The Company’s income tax benefit was $52,600 for the year ended December 31, 2025. The benefit was primarily attributable to the release of valuation allowance related to U.S. federal and certain state deferred tax assets of $69,939 during the third quarter of 2025. The Company regularly assess the need for a valuation allowance on our deferred tax assets. In making this assessment, both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine is considered, based on the weight of available evidence, whether it is more likely than not that some or all the deferred tax assets will not be realized. As of December 31, 2025, based on all available positive and negative evidence, having demonstrated sustained U.S. profitability, which is objective and verifiable, and taking into account anticipated future earnings, the Company has concluded it is more likely than not that it will realize its U.S. federal and U.S. state deferred tax assets. The remaining amount of the changes in valuation allowance is related to reductions in deferred tax assets arising from current-year activity.
As of December 31, 2025, the Company had approximately $16,712 in federal net operating loss (“NOL”) carryforwards and $4,311 in federal tax credits. If not utilized, the federal tax credit carryforwards will expire at various dates beginning in 2042. The federal NOL carryforward can be carried forward indefinitely. As of December 31, 2025, the Company had approximately $13,212 in state NOL carryforwards and $1,569 in California tax credits. If not utilized, the state NOL carryforwards will expire at various dates beginning in 2031. The California state tax credits can be carried forward indefinitely. The Company had $10,014 of foreign NOLs that do not expire. The amount of net operating loss and tax credits carryforwards reflected in the financial statements differ from the amounts reported on the tax return due to uncertain tax positions related to tax laws and regulations that are subject to varied interpretation by the tax authorities.
Certain tax attributes may be subject to an annual limitation as a result of the issuance of stock, which may constitute a change of ownership as defined under Internal Revenue Code Section 382. The Internal Revenue Code Section 382 study is in process as of December 31, 2025.
The Company provides for U.S. and foreign income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the U.S. On December 31, 2025, the amount of unrecognized deferred tax liability for temporary differences on undistributed earnings in foreign subsidiaries upon which U.S. and foreign income taxes have not been provided is not material.
In general, it is the Company’s practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain
other circumstances. The amount of undistributed earnings of non-U.S. subsidiaries at December 31, 2025, as well as the related deferred income tax, if any, is not material.
The Company files U.S. federal income tax returns as well as various state, local, and foreign jurisdictions. As of December 31, 2025, tax years 2013 and later remain open for examination.
ASC 740 clarifies the accounting and reporting for uncertainties in income tax law and prescribes a comprehensive model for financial statement recognition measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. ASC 740 requires that tax effects of an uncertain tax position be recognized only if it is “more likely than not” to be sustained by the taxing authority as of the reporting date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Balance of unrecognized tax benefits at beginning of year | $ | 22,392 | $ | 20,337 | $ | 17,044 | |||||||||||
| Additions based on tax positions related to the current period | 4,325 | 5,209 | 1,571 | ||||||||||||||
| Additions for tax positions of prior periods | 3,629 | 816 | 1,947 | ||||||||||||||
| Reductions for tax positions of prior periods | (2,277) | (3,162) | — | ||||||||||||||
| Release due to expiration of statute of limitations | (1,241) | (808) | (225) | ||||||||||||||
| Balance of unrecognized tax benefits at end of year | $ | 26,828 | $ | 22,392 | $ | 20,337 | |||||||||||
Amounts included in the balance of unrecognized tax benefits as of December 31, 2025, 2024 and 2023, if recognized, would affect the effective tax rate upon recognition. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $17,599 as of December 31, 2025.
As of December 31, 2025, the Company recognized $13,921 of interest and penalties related to unrecognized tax benefits in the provision for taxes. Interest and penalties related to income tax liabilities are included in income tax expense. During the years ended December 31, 2025, 2024 and 2023, the Company recognized $7,446, $2,864 and $1,816, respectively, in interest expense and penalties. The Company has not made any payments on interest and penalties as of December 31, 2025.
The Organization for Economic Co-operation and Development Pillar Two guidelines published to date include transition and safe harbor rules around the implementation of the Pillar Two global minimum tax of 15%. Based on current enacted legislation, the Company is not subject to Pillar Two tax since the Company’s revenue is currently below the threshold. The Company is monitoring developments and evaluating the impacts these new rules will have on its future income tax provision and effective income tax rate.
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The Company adopted the modifications to the capitalization of research and development expenses and changes to calculations for the limitation on deductions for interest expense for the year ended December 31, 2025, which did not have a material impact.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2024 | Feb 25, 2025 | |
| 2023 | Feb 21, 2024 | |
| 2022 | Feb 22, 2023 | |
| 2021 | Feb 25, 2022 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.