Reversible ubiquitin modification of cell signaling molecules has emerged as a critical mechanism by which cells respond to extracellular stimuli. Although ubiquitination of TGF-β–activated kinase 1 (TAK1) is critical for NF-κB activation in T cells, the regulation of its deubiquitination is unclear. We show that USP18, which was previously reported to be important in regulating type I interferon signaling in innate immunity, regulates T cell activation and T helper 17 (Th17) cell differentiation by deubiquitinating the TAK1–TAB1 complex. USP18-deficient T cells are defective in Th17 differentiation and Usp18−/− mice are resistant to experimental autoimmune encephalomyelitis (EAE). In response to T cell receptor engagement, USP18-deficient T cells exhibit hyperactivation of NF-κB and NFAT and produce increased levels of IL-2 compared with the wild-type controls. Importantly, USP18 is associated with and deubiquitinates the TAK1–TAB1 complex, thereby restricting expression of IL-2. Our findings thus demonstrate a previously uncharacterized negative regulation of TAK1 activity during Th17 differentiation, suggesting that USP18 may be targeted to treat autoimmune diseases.