Hey, this is a known issue. In BYOK/proxy configs starting from version 2.5.0+, <think> tags show up as plain text.
The same issue was reported here: What the <think> tag in Cursor version 2.5.14 has been changed to?. The team is aware and the bug is tracked.
For now, rolling back to 2.4.x is a working workaround, like you already found.