Deubiquitinating enzymes (DUbs) play important roles in many ubiquitin-dependent pathways, yet how DUbs themselves are regulated is not well understood. Here, we provide insight into the mechanism by which ubiquitination directly enhances the activity of ataxin-3, a DUb implicated in protein quality control and the disease protein in the polyglutamine neurodegenerative disorder, Spinocerebellar Ataxia Type 3. We identify Lys-117, which resides near the catalytic triad, as the primary site of ubiquitination in wild type and pathogenic ataxin-3. Further studies indicate that ubiquitin-dependent activation of ataxin-3 at Lys-117 is important for its ability to reduce high molecular weight ubiquitinated species in cells. Ubiquitination at Lys-117 also facilitates the ability of ataxin-3 to induce aggresome formation in cells. Finally, structure-function studies support a model of activation whereby ubiquitination at Lys-117 enhances ataxin-3 activity independent of the known ubiquitin-binding sites in ataxin-3, most likely through a direct conformational change in or near the catalytic domain.