TGF-beta and BMP receptor kinases activate Smad transcription factors by C-terminal phosphorylation. We have identified a subsequent agonist-induced phosphorylation that plays a central dual role in Smad transcriptional activation and turnover. As receptor-activated Smads form transcriptional complexes, they are phosphorylated at an interdomain linker region by CDK8 and CDK9, which are components of transcriptional mediator and elongation complexes. These phosphorylations promote Smad transcriptional action, which in the case of Smad1 is mediated by the recruitment of YAP to the phosphorylated linker sites. An effector of the highly conserved Hippo organ size control pathway, YAP supports Smad1-dependent transcription and is required for BMP suppression of neural differentiation of mouse embryonic stem cells. The phosphorylated linker is ultimately recognized by specific ubiquitin ligases, leading to proteasome-mediated turnover of activated Smad proteins. Thus, nuclear CDK8/9 drive a cycle of Smad utilization and disposal that is an integral part of canonical BMP and TGF-beta pathways.