diff --git a/lib/instana/instrumentation/instrumented_request.rb b/lib/instana/instrumentation/instrumented_request.rb
index cf5ad31e..fcfa041a 100644
--- a/lib/instana/instrumentation/instrumented_request.rb
+++ b/lib/instana/instrumentation/instrumented_request.rb
@@ -122,6 +122,7 @@ def context_from_instana_headers
         long_instana_id: long_instana_id? ? sanitized_t : nil,
         external_trace_id: external_trace_id,
         external_state: @env['HTTP_TRACESTATE'],
+        external_trace_flags: context_from_trace_parent[:external_trace_flags],
         from_w3c: false
       }.reject { |_, v| v.nil? }
     end
@@ -140,6 +141,7 @@ def context_from_trace_parent
         external_state: @env['HTTP_TRACESTATE'],
         trace_id: trace_id,
         span_id: span_id,
+        external_trace_flags: matches['flags'],
         from_w3c: true
       }
     end
diff --git a/lib/instana/instrumentation/net-http.rb b/lib/instana/instrumentation/net-http.rb
index 4a07b252..2301a266 100644
--- a/lib/instana/instrumentation/net-http.rb
+++ b/lib/instana/instrumentation/net-http.rb
@@ -56,7 +56,8 @@ def request(*args, &block)
           # without a backtrace (no exception)
           current_span.record_exception(nil)
         end
-
+        extra_headers = ::Instana::Util.extra_header_tags(response)&.merge(::Instana::Util.extra_header_tags(request))
+        kv_payload[:http][:header] = extra_headers unless extra_headers&.empty?
         response
       rescue => e
         current_span&.record_exception(e)
diff --git a/lib/instana/instrumentation/rack.rb b/lib/instana/instrumentation/rack.rb
index 40c8c3eb..11b81a7a 100644
--- a/lib/instana/instrumentation/rack.rb
+++ b/lib/instana/instrumentation/rack.rb
@@ -10,7 +10,7 @@ def initialize(app)
       @app = app
     end
 
-    def call(env) # rubocop:disable Metrics/CyclomaticComplexity,Metrics/MethodLength
+    def call(env)
       req = InstrumentedRequest.new(env)
       kvs = {
         http: req.request_tags
@@ -26,75 +26,14 @@ def call(env) # rubocop:disable Metrics/CyclomaticComplexity,Metrics/MethodLengt
       @trace_token = OpenTelemetry::Context.attach(trace_ctx)
       status, headers, response = @app.call(env)
 
-      if ::Instana.tracer.tracing?
-        unless req.correlation_data.empty?
-          current_span[:crid] = req.correlation_data[:id]
-          current_span[:crtp] = req.correlation_data[:type]
-        end
-
-        if !req.instana_ancestor.empty? && req.continuing_from_trace_parent?
-          current_span[:ia] = req.instana_ancestor
-        end
-
-        if req.continuing_from_trace_parent?
-          current_span[:tp] = true
-        end
-
-        if req.external_trace_id?
-          current_span[:lt] = req.external_trace_id
-        end
-
-        if req.synthetic?
-          current_span[:sy] = true
-        end
-
-        # In case some previous middleware returned a string status, make sure that we're dealing with
-        # an integer.  In Ruby nil.to_i, "asdfasdf".to_i will always return 0 from Ruby versions 1.8.7 and newer.
-        # So if an 0 status is reported here, it indicates some other issue (e.g. no status from previous middleware)
-        # See Rack Spec: https://www.rubydoc.info/github/rack/rack/file/SPEC#label-The+Status
-        kvs[:http][:status] = status.to_i
-
-        if status.to_i >= 500
-          # Because of the 5xx response, we flag this span as errored but
-          # without a backtrace (no exception)
-          ::Instana.tracer.log_error(nil)
-        end
-
-        # If the framework instrumentation provides a path template,
-        # pass it into the span here.
-        # See: https://www.instana.com/docs/tracing/custom-best-practices/#path-templates-visual-grouping-of-http-endpoints
-        kvs[:http][:path_tpl] = env['INSTANA_HTTP_PATH_TEMPLATE'] if env['INSTANA_HTTP_PATH_TEMPLATE']
-
-        # Save the span context before the trace ends so we can place
-        # them in the response headers in the ensure block
-        trace_context = ::Instana.tracer.current_span.context
-      end
-
+      trace_context = process_span_tags(req, current_span, kvs, status, env) if ::Instana.tracer.tracing?
+      merge_response_headers(kvs, headers)
       [status, headers, response]
     rescue Exception => e
       current_span.record_exception(e) if ::Instana.tracer.tracing?
       raise
     ensure
-      if ::Instana.tracer.tracing?
-        if headers
-          # Set response headers; encode as hex string
-          if trace_context.active?
-            headers['X-Instana-T'] = trace_context.trace_id_header
-            headers['X-Instana-S'] = trace_context.span_id_header
-            headers['X-Instana-L'] = '1'
-
-            headers['Tracestate'] = trace_context.trace_state_header
-          else
-            headers['X-Instana-L'] = '0'
-          end
-
-          headers['Traceparent'] = trace_context.trace_parent_header
-          headers['Server-Timing'] = "intid;desc=#{trace_context.trace_id_header}"
-        end
-        current_span.set_tags(kvs)
-        OpenTelemetry::Context.detach(@trace_token) if @trace_token
-        current_span.finish
-      end
+      finalize_trace(current_span, kvs, headers, trace_context) if ::Instana.tracer.tracing?
     end
 
     private
@@ -112,7 +51,8 @@ def extract_trace_context(incoming_context)
             level: incoming_context[:level],
             baggage: {
               external_trace_id: incoming_context[:external_trace_id],
-              external_state: incoming_context[:external_state]
+              external_state: incoming_context[:external_state],
+              external_trace_flags: incoming_context[:external_trace_flags]
             }
           )
         end
@@ -121,5 +61,85 @@ def extract_trace_context(incoming_context)
       end
       parent_context
     end
+
+    def process_span_tags(req, current_span, kvs, status, env)
+      add_correlation_data(req, current_span)
+      add_trace_parent_data(req, current_span)
+      add_status_and_error(kvs, status)
+      add_path_template(kvs, env)
+
+      # Save the span context before the trace ends so we can place
+      # them in the response headers in the ensure block
+      ::Instana.tracer.current_span.context
+    end
+
+    def add_correlation_data(req, current_span)
+      return if req.correlation_data.empty?
+
+      current_span[:crid] = req.correlation_data[:id]
+      current_span[:crtp] = req.correlation_data[:type]
+    end
+
+    def add_trace_parent_data(req, current_span)
+      if !req.instana_ancestor.empty? && req.continuing_from_trace_parent?
+        current_span[:ia] = req.instana_ancestor
+      end
+
+      current_span[:tp] = true if req.continuing_from_trace_parent?
+      current_span[:lt] = req.external_trace_id if req.external_trace_id?
+      current_span[:sy] = true if req.synthetic?
+    end
+
+    def add_status_and_error(kvs, status)
+      # In case some previous middleware returned a string status, make sure that we're dealing with
+      # an integer.  In Ruby nil.to_i, "asdfasdf".to_i will always return 0 from Ruby versions 1.8.7 and newer.
+      # So if an 0 status is reported here, it indicates some other issue (e.g. no status from previous middleware)
+      # See Rack Spec: https://www.rubydoc.info/github/rack/rack/file/SPEC#label-The+Status
+      kvs[:http][:status] = status.to_i
+
+      return unless status.to_i >= 500
+
+      # Because of the 5xx response, we flag this span as errored but
+      # without a backtrace (no exception)
+      ::Instana.tracer.log_error(nil)
+    end
+
+    def add_path_template(kvs, env)
+      # If the framework instrumentation provides a path template,
+      # pass it into the span here.
+      # See: https://www.instana.com/docs/tracing/custom-best-practices/#path-templates-visual-grouping-of-http-endpoints
+      kvs[:http][:path_tpl] = env['INSTANA_HTTP_PATH_TEMPLATE'] if env['INSTANA_HTTP_PATH_TEMPLATE']
+    end
+
+    def merge_response_headers(kvs, headers)
+      extra_response_headers = ::Instana::Util.extra_header_tags(headers)
+      if kvs[:http][:header].nil?
+        kvs[:http][:header] = extra_response_headers
+      else
+        kvs[:http][:header].merge!(extra_response_headers)
+      end
+    end
+
+    def finalize_trace(current_span, kvs, headers, trace_context)
+      set_response_headers(headers, trace_context) if headers
+      current_span.set_tags(kvs)
+      OpenTelemetry::Context.detach(@trace_token) if @trace_token
+      current_span.finish
+    end
+
+    def set_response_headers(headers, trace_context)
+      # Set response headers; encode as hex string
+      if trace_context.active?
+        headers['X-Instana-T'] = trace_context.trace_id_header
+        headers['X-Instana-S'] = trace_context.span_id_header
+        headers['X-Instana-L'] = '1'
+        headers['Tracestate'] = trace_context.trace_state_header
+      else
+        headers['X-Instana-L'] = '0'
+      end
+
+      headers['Traceparent'] = trace_context.trace_parent_header
+      headers['Server-Timing'] = "intid;desc=#{trace_context.trace_id_header}"
+    end
   end
 end
diff --git a/lib/instana/trace/span_context.rb b/lib/instana/trace/span_context.rb
index 00e96c40..08859f36 100644
--- a/lib/instana/trace/span_context.rb
+++ b/lib/instana/trace/span_context.rb
@@ -42,8 +42,16 @@ def span_id_header
     def trace_parent_header
       trace = (@baggage[:external_trace_id] || trace_id_header).rjust(32, '0')
       parent = span_id_header.rjust(16, '0')
-      flags = @level == 1 ? "03" : "02"
-
+      flags = if @baggage[:external_trace_flags]
+                # Parse external flags as 8-bit hex, clear LSB, then set LSB based on level
+                external_flags = @baggage[:external_trace_flags].to_i(16) & 0xFE # Clear LSB
+                combined_flags = external_flags | (@level == 1 ? 1 : 0) # Set LSB based on level
+                combined_flags = [combined_flags, 0xFF].min # Cap at 8-bit max
+                format('%02x', combined_flags)
+              else
+                @level == 1 ? "03" : "02"
+              end
+      flags = "03" if flags > "03"
       "00-#{trace}-#{parent}-#{flags}"
     end
 
diff --git a/lib/instana/util.rb b/lib/instana/util.rb
index 28f49fbd..f82e2940 100644
--- a/lib/instana/util.rb
+++ b/lib/instana/util.rb
@@ -181,6 +181,19 @@ def maybe_timeout(timeout, start_time)
         timeout -= (timeout_timestamp - start_time)
         timeout.positive? ? timeout : 0
       end
+
+      def extra_header_tags(req_res_headers)
+        return {} if req_res_headers.nil?
+        return nil unless ::Instana.agent.extra_headers
+
+        headers = {}
+
+        ::Instana.agent.extra_headers.each do |custom_header|
+          headers[custom_header.to_sym] = req_res_headers[custom_header] if req_res_headers.key?(custom_header)
+        end
+
+        headers
+      end
     end
   end
 end
diff --git a/test/instrumentation/rack_instrumented_request_test.rb b/test/instrumentation/rack_instrumented_request_test.rb
index ab8dac73..3be62406 100644
--- a/test/instrumentation/rack_instrumented_request_test.rb
+++ b/test/instrumentation/rack_instrumented_request_test.rb
@@ -69,6 +69,7 @@ def test_incoming_w3c_context
       external_state: nil,
       trace_id: 'a3ce929d0e0e4736',
       span_id: '00f067aa0ba902b7',
+      external_trace_flags: "01",
       from_w3c: true
     }
 
@@ -86,6 +87,7 @@ def test_incoming_w3c_context_newer_version_additional_fields
       external_state: nil,
       trace_id: 'a3ce929d0e0e4736',
       span_id: '00f067aa0ba902b7',
+      external_trace_flags: "01",
       from_w3c: true
     }
 
@@ -103,6 +105,7 @@ def test_incoming_w3c_context_unknown_flags
       external_state: nil,
       trace_id: 'a3ce929d0e0e4736',
       span_id: '00f067aa0ba902b7',
+      external_trace_flags: "ff",
       from_w3c: true
     }