ETSY INCETSY
ETSY INC Income Taxes Disclosure
Note 3—Income Taxes
The following are the domestic and foreign components of the Company’s income before income taxes (in thousands):
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | 2023 | |||||||||
| United States | $ | 132,455 | $ | 189,734 | $ | 167,924 | |||||
| International | 114,210 | 221,041 | 124,896 | ||||||||
| Income before income taxes | $ | 246,665 | $ | 410,775 | $ | 292,820 | |||||
The income tax provision (benefit) is comprised of the following (in thousands):
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | 2023 | |||||||||
| Current: | |||||||||||
| U.S. Federal | $ | 6,211 | $ | 73,298 | $ | 13,737 | |||||
| U.S. State | 11,262 | 18,170 | (5,642) | ||||||||
| International | 26,995 | 30,472 | 27,243 | ||||||||
| Total current | 44,468 | 121,940 | 35,338 | ||||||||
| Deferred: | |||||||||||
| U.S. Federal | 30,461 | (10,877) | (20,925) | ||||||||
| U.S. State | 5,309 | 1,437 | 5,176 | ||||||||
| International | 3,445 | (5,006) | (34,337) | ||||||||
| Total deferred | 39,215 | (14,446) | (50,086) | ||||||||
| Total income tax provision (benefit) | $ | 83,683 | $ | 107,494 | $ | (14,748) | |||||
Below is a reconciliation of the income tax provision (benefit) at the U.S. federal statutory income tax rate to the Company’s total income tax provision (benefit) pursuant to the disclosure requirements of ASU 2023-09 for the year ended December 31, 2025 (in thousands):
| Year Ended December 31, 2025 | ||||||||
| Amount | Percent | |||||||
| U.S. Federal statutory tax rate | $ | 51,799 | 21.0 | % | ||||
| (1) State and local income taxes, net of federal income tax effect (a) | 6,155 | 2.5 | ||||||
| (2) Foreign tax effects | ||||||||
| Ireland | ||||||||
| Foreign rate differential | (15,155) | (6.1) | ||||||
| Pillar Two top-up taxes | 4,712 | 1.9 | ||||||
| Other | (243) | (0.1) | ||||||
| United Kingdom | ||||||||
| Foreign rate differential | (3,278) | (1.3) | ||||||
| Valuation allowance | 21,164 | 8.6 | ||||||
| Tax deficiencies from stock-based compensation | 1,834 | 0.7 | ||||||
| Stock-based compensation | (3,935) | (1.6) | ||||||
| Other | 1,522 | 0.6 | ||||||
| Other foreign jurisdictions | (164) | (0.1) | ||||||
| (3) Enactment of new tax laws | — | — | ||||||
| (4) Effect of cross-border tax laws | ||||||||
| U.S. Tax on foreign earnings net of tax credits | 6,630 | 2.7 | ||||||
| Foreign derived income deduction | (1,274) | (0.5) | ||||||
| (5) Tax credits | ||||||||
| Research and development tax credits | (17,155) | (7.0) | ||||||
| Other | (184) | (0.1) | ||||||
| (6) Valuation allowances | 37,571 | 15.2 | ||||||
| (7) Nontaxable or nondeductible items | ||||||||
| Tax deficiencies from stock-based compensation | 12,078 | 4.9 | ||||||
| Non-deductible compensation | 1,634 | 0.7 | ||||||
| Foreign stock-based compensation | 6,624 | 2.7 | ||||||
| Financing interest | (12,818) | (5.2) | ||||||
| Goodwill impairment | 21,358 | 8.7 | ||||||
| Capital loss | (37,411) | (15.2) | ||||||
| Other | 1,730 | 0.7 | ||||||
| (8) Changes in unrecognized tax benefits | 1,220 | 0.5 | ||||||
| (9) Other adjustments | (731) | (0.3) | ||||||
| Effective tax rate | $ | 83,683 | 33.9 | % | ||||
| (a) State taxes in California, New Jersey, New York, Pennsylvania, Illinois, and Tennessee make up a majority (greater than 50 percent) of the tax effect in this category. | ||||||||
Below is a reconciliation of the income tax provision (benefit) at the U.S. federal statutory income tax rate to the Company’s total income tax provision (benefit) pursuant to the disclosure requirements prior to the adoption of ASU 2023-09 for the years ended December 31, 2024 and 2023 (in thousands):
Year Ended December 31, | ||||||||
| 2024 | 2023 | |||||||
| Income tax provision (benefit) at the federal statutory rate | $ | 86,263 | $ | 61,492 | ||||
| State and local income taxes, net of federal benefit | 7,970 | 4,329 | ||||||
| Foreign income tax rate differential | (33,066) | (40,506) | ||||||
| Stock-based compensation | 39,036 | 15,167 | ||||||
| Research and development credit | (12,321) | (19,034) | ||||||
| Financing and interest | 5,736 | — | ||||||
| Change in valuation allowance | 5,545 | 10,285 | ||||||
| Divestiture of Elo7 | — | (55,934) | ||||||
| Other | 8,331 | 9,453 | ||||||
| Total income tax provision (benefit) | $ | 107,494 | $ | (14,748) | ||||
| Effective income tax rate | 26.2 | % | (5.0) | % | ||||
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):
| As of December 31, | ||||||||
| 2025 | 2024 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 100,999 | $ | 81,679 | ||||
| Research and development credit carryforwards | — | 771 | ||||||
| Capitalized research expenses | 76,691 | 118,167 | ||||||
| Capital Losses | 43,688 | — | ||||||
| Lease liability | 31,094 | 33,601 | ||||||
| Stock-based compensation expense | 21,662 | 26,930 | ||||||
| Financing and interest | 4,910 | 15,309 | ||||||
| Accrued bonus | 10,885 | 11,103 | ||||||
| Excess tax basis in intangible assets | 3,516 | 2,696 | ||||||
| Other deferred tax assets | 23,026 | 17,886 | ||||||
| Total deferred tax assets | 316,471 | 308,142 | ||||||
| Less: valuation allowance | 79,067 | 12,481 | ||||||
| Total net deferred tax asset | 237,404 | 295,661 | ||||||
| Deferred tax liabilities: | ||||||||
| Excess book basis in intangible assets | (72,650) | (104,612) | ||||||
| Right-of-use asset | (27,919) | (30,306) | ||||||
| Depreciation | (23,542) | (22,030) | ||||||
| Other deferred tax liabilities | (2,791) | (1,040) | ||||||
| Total deferred tax liabilities | (126,902) | (157,988) | ||||||
| Net deferred tax assets | $ | 110,502 | $ | 137,673 | ||||
Below is the amount of income taxes, net of refunds received, paid by the Company pursuant to the disclosure requirements of ASU 2023-09 for the year ended December 31, 2025 (in thousands):
Year Ended December 31, 2025 | |||||
| Federal | $ | 34,585 | |||
| State | 2,907 | ||||
| Foreign | |||||
| Ireland | 19,547 | ||||
| Other | 6,366 | ||||
| Total | $ | 63,405 | |||
The Company paid total income taxes, net of refunds received, of $89.6 million and $42.7 million for the years ended December 31, 2024 and 2023, respectively.
As of December 31, 2025, the Company had the following tax credit, capital loss and operating loss carryforwards available to offset income tax liability and taxable income, respectively, in future years (in thousands):
| December 31, 2025 | Expiration Period | |||||||
| U.S. Federal credit carryforwards | $ | 4,247 | 2031-2035 | |||||
| U.S. Federal capital loss carryforwards | 178,148 | 2030 | ||||||
| U.S. State net operating loss carryforwards | 28,537 | 2037-2045 | ||||||
| U.S. State credit carryforwards | 4,359 | 2030-Unlimited | ||||||
| U.S. State capital loss carryforwards | 178,148 | 2030-2040 | ||||||
| Non-U.S. net operating loss carryforwards | 395,982 | Unlimited | ||||||
Utilization of the net operating losses (“NOLs”) is dependent on generating sufficient taxable income from the Company’s operations in each of the respective jurisdictions to which the NOLs relate, while taking into account tax filing methodologies and limitations and/or restrictions on the Company’s ability to use them. A significant component of the Company’s Non-U.S. NOLs were acquired as part of the acquisition of Depop. Certain U.K. tax laws impose limitations on the utilization of these NOLs by any other entity. All NOLs are also subject to review by relevant tax authorities in the jurisdictions to which they relate.
Utilization of U.S. capital loss carryforwards is dependent on the generation of sufficient capital gains in the U.S. Because the Company does not expect to generate sufficient U.S. capital gains within the applicable carryforward periods, a full valuation allowance has been recorded against the U.S. federal and state capital loss carryforwards.
The Company assesses the likelihood of its ability to realize the benefit of its deferred tax assets in each jurisdiction by evaluating all relevant positive and negative evidence at each reporting date. To the extent the Company determines that some or all of its deferred tax assets are not more likely than not to be realized, it establishes a valuation allowance.
The following table summarizes the valuation allowance activity for the periods indicated (in thousands):
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | 2023 | |||||||||
| Balance as of the beginning of period | $ | 12,481 | $ | 4,154 | $ | 3,524 | |||||
| Additions charged to expense | 65,427 | 8,578 | 10,960 | ||||||||
| Deletions credited to expense | — | — | (124) | ||||||||
| Currency translation and other balance sheet activity | 1,159 | (251) | (10,206) | ||||||||
| Balance as of the end of period | $ | 79,067 | $ | 12,481 | $ | 4,154 | |||||
Unrecognized tax benefits
The following table summarizes the unrecognized tax benefit activity as well as the amounts included on the Consolidated Balance Sheets for the periods indicated (in thousands):
| As of December 31, | |||||||||||
| 2025 | 2024 | 2023 | |||||||||
| Balance as of the beginning of period | $ | 56,809 | $ | 51,673 | $ | 35,158 | |||||
| Additions based on tax positions related to the current year | 8,246 | 7,451 | 10,225 | ||||||||
| Additions for tax positions of prior years | 8,132 | 2,846 | 6,278 | ||||||||
| Reductions for tax provisions of prior years | (14,265) | (853) | — | ||||||||
| Lapse of statute of limitations | (2,121) | (4,172) | (3) | ||||||||
| Reductions for sale of business | (1,091) | — | — | ||||||||
| Settlements | — | (107) | — | ||||||||
| Currency translation | 35 | (29) | 15 | ||||||||
| Balance as of the end of period | $ | 55,745 | $ | 56,809 | $ | 51,673 | |||||
The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $51.8 million at December 31, 2025.
The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. The outcomes and timing of such events are highly uncertain.
The Company is subject to taxation in the United States, Ireland, the United Kingdom, and various U.S. states and foreign jurisdictions. As of December 31, 2025, for major tax jurisdictions the following tax years remain open to examination:
Years Open | |||||
United States | 2022-2025 | ||||
Ireland | 2021-2025 | ||||
| United Kingdom | 2023-2025 | ||||
U.S. States | 2014-2025 | ||||
The Company is under examination by the U.S. Internal Revenue Service for the calendar year 2022, as well as by several U.S. states and non-U.S. jurisdictions for various years. These examinations may result in proposed adjustments to the Company’s income tax liability or tax attributes with respect to years under examination as well as subsequent periods.
The (provision) benefit for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. Any adjustments as a result of any examination may result in additional taxes or penalties against the Company. If the ultimate result of these audits differ from original or adjusted estimates, they could have a material impact on the Company’s tax provision.
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. OBBBA includes significant corporate tax changes, including a restoration of the current deductibility for domestic research expenditures beginning in 2025, with transition options for previously capitalized amounts. OBBBA also includes changes to
certain U.S. international provisions beginning in 2026. While the Company expects certain provisions of OBBBA to favorably change the timing of cash tax payments in the near term, it does not expect the legislation to have a material impact on the provision for income taxes. The Company will continue to assess and monitor OBBBA’s impact on its consolidated financial statements.
Over the past several years, the Organization for Economic Cooperation and Development (“OECD”) has developed a “two pillar” framework to address the tax challenges arising from digitalization. Pillar Two of the project introduces a global minimum tax rate of 15% and has been enacted by a significant number of jurisdictions, with effective dates beginning in 2024. On January 5, 2026, the OECD released a "Side-by-Side" package, introducing a new safe harbor that effectively recognizes the U.S. tax system as compliant with global minimum tax objectives. For U.S.-parented multinational companies, this agreement largely eliminates the risk of foreign "top-up" taxes on U.S. income. Local foreign jurisdiction "top-up" taxes will continue to apply.
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.