DC‐STAMP is a multi‐pass transmembrane protein essential for cell–cell fusion between osteoclast precursors during osteoclast (OC) development. DC‐STAMP−/− mice have mild osteopetrosis and form mononuclear cells with limited resorption capacity. The identification of an Immunoreceptor Tyrosine‐based Inhibitory Motif (ITIM) on the cytoplasmic tail of DC‐STAMP suggested a potential signaling function. The absence of a known DC‐STAMP ligand, however, has hindered the elucidation of downstream signaling pathways. To address this problem, we engineered a light‐activatable DC‐STAMP chimeric molecule in which light exposure mimics ligand engagement that can be traced by downstream Ca2+ signaling. Deletion of the cytoplasmic ITIM resulted in a significant elevation in the amplitude and duration of intracellular Ca2+ flux. Decreased NFATc1 expression in DC‐STAMP−/− cells was restored by DC‐STAMP over‐expression. Multiple biological phenotypes including cell–cell fusion, bone erosion, cell mobility, DC‐STAMP cell surface distribution, and NFATc1 nuclear translocation were altered by deletion of the ITIM and adjacent amino acids. In contrast, mutations on each of the tyrosine residues surrounding the ITIM showed no effect on DC‐STAMP function. Collectively, our results suggest that the ITIM on DC‐STAMP is a functional motif that regulates osteoclast differentiation through the NFATc1/Ca2+ axis. J. Cell. Physiol. 232: 2538–2549, 2017. © 2016 Wiley Periodicals, Inc.