Since it's overly complicated, here's how you enable formatted toots:
1. Go to "app settings" in the web app and select "Show content-type choice when authoring toots" 2. Click the icon next to the globe to select either Markdown or HTML formatting. 3. If you want this to be permanent and also work on mobile apps like Tusky or Toot!, go to Preferences -> Profile -> Other and change "Default format for toots".