Hematopoietic stem cell (HSC) function is regulated by activation of receptor tyrosine kinases (RTKs). Receptor protein tyrosine phosphatases (PTPs) counterbalance RTK signaling; however, the functions of receptor PTPs in HSCs remain incompletely understood. We found that a receptor PTP, PTPσ, was substantially overexpressed in mouse and human HSCs compared with more mature hematopoietic cells. Competitive transplantation of bone marrow cells from PTPσ-deficient mice revealed that the loss of PTPσ substantially increased long-term HSC-repopulating capacity compared with BM cells from control mice. While HSCs from PTPσ-deficient mice had no apparent alterations in cell-cycle status, apoptosis, or homing capacity, these HSCs exhibited increased levels of activated RAC1, a RhoGTPase that regulates HSC engraftment capacity. shRNA-mediated silencing of PTPσ also increased activated RAC1 levels in wild-type HSCs. Functionally, PTPσ-deficient BM cells displayed increased cobblestone area-forming cell (CAFC) capacity and augmented transendothelial migration capacity, which was abrogated by RAC inhibition. Specific selection of human cord blood CD34⁺CD38⁻CD45RA⁻lin⁻ PTPσ⁻ cells substantially increased the repopulating capacity of human HSCs compared with CD34⁺CD38⁻CD45RA⁻lin⁻ cells and CD34⁺CD38⁻CD45RA⁻lin⁻PTPσ⁺ cells. Our results demonstrate that PTPσ regulates HSC functional capacity via RAC1 inhibition and suggest that selecting for PTPσ-negative human HSCs may be an effective strategy for enriching human HSCs for transplantation.