This paper presents an adaptive control algorithm called improved linear sinusoidal tracer (ILST) for a three-phase distribution static compensator (DSTATCOM) to perform different functions like power factor correction, harmonics elimination, load balancing, and voltage regulation under linear and nonlinear loads. A prototype DSTATCOM is developed using a digital signal processor to test the control algorithm in real-time. The performance of the DSTATCOM with the proposed ILST control algorithm is found to be satisfactory under various load conditions.