The molecular mechanisms whereby CD8+ T cells become “exhausted” in the tumor microenvironment remain unclear. Programmed death ligand-1 (PD-L1) is upregulated on tumor cells and PD-1-PD-L1 blockade has significant efficacy in human tumors; however, most patients do not respond, suggesting additional mechanisms underlying T cell exhaustion. B7 superfamily member 1 (B7S1), also called B7-H4, B7x, or VTCN1, negatively regulates T cell activation. Here we show increased B7S1 expression on myeloid cells from human hepatocellular carcinoma correlated with CD8+ T cell dysfunction. B7S1 inhibition suppressed development of murine tumors. Putative B7S1 receptor was co-expressed with PD-1 but not T cell immunoglobulin and mucin-domain containing-3 (Tim-3) at an activated state of early tumor-infiltrating CD8+ T cells, and B7S1 promoted T cell exhaustion, possibly through Eomes overexpression. Combinatorial blockade of B7S1 and PD-1 synergistically enhanced anti-tumor immune responses. Collectively, B7S1 initiates dysfunction of tumor-infiltrating CD8+ T cells and may be targeted for cancer immunotherapy. Display omitted •Upregulated B7S1 expression on APCs correlates with CD8+ T dysfunction in human cancer•Inhibition of B7S1 promotes CD8+ T cell-mediated tumor immunity in murine cancer models•B7S1, via its receptor expressed on early activated CD8+ TILs, drives T cell exhaustion•Co-blockade of B7S1 and PD-1 can more potently reinvigorate anti-tumor responses Mechanisms driving T cell exhaustion have not been understood. Li et al. demonstrate that B7S1 on tumor-infiltrating myeloid cells initiates exhaustion of activated CD8+ TILs through upregulating Eomes, thus proposing B7S1 as a promising target to enhance the efficacy of anti-PD-1 therapy.