Acute microglial activation plays an important role in neuroprotection. However, dysregulated, prolonged microgliosis exacerbates neurodegeneration through excessive release of pro-inflammatory cytokines and cytotoxic factors. Interferon-gamma (IFN-γ), an inflammatory cytokine, exacerbates the detrimental microglial response. Although various anti-inflammatory drugs have been evaluated as interventions for microglia-mediated neuroinflammation, no anti-inflammatories are in clinical use for microgliosis. The present study evaluated the anti-inflammatory mechanisms of oxysterols, blood brain barrier (BBB) penetrable bioactive lipids, revealing that this intervention suppresses neuroinflammation by disrupting membrane lipid raft formation and caveolae-mediated endosomal IFN-γ signaling. We find that 25-hydroxycholesterol (25-HC) rapidly repressed IFN-γ receptor trafficking to lipid rafts in microglia by disrupting raft formation, thereby suppressing microglial inflammatory response. IFN-γ treatment upregulated expression of Cav-1, a major component of caveolae, and IFN-γ signaling was sustained through Cav-1+ signaling endosomes. 25-HC repressed IFN-γ induction of Cav-1 expression in microglia, and subsequently suppressed the chronic inflammatory response. Taken together, these findings demonstrated that 25-HC effectively regulate the inflammatory status of microglia by mediating the formation of rafts and caveolae-dependent signaling endosomes. Given the important roles of IFN-γ and microglia in the pathology of neurodegenerative brain diseases, a novel anti-inflammatory mechanism of 25-HC that is not receptor-dependent, but rather is related to the regulation of membrane rafts and caveolae, suggests a new therapeutic target for inflammatory neurodegenerations.