Cytotoxic T lymphocyte antigen 4 (CTLA-4) is an essential negative regulator of T cell immune responses whose mechanism of action is the subject of debate. CTLA-4 shares two ligands (CD80 and CD86) with a stimulatory receptor, CD28. Here, we show that CTLA-4 can capture its ligands from opposing cells by a process of trans-endocytosis. After removal, these costimulatory ligands are degraded inside CTLA-4—expressing cells, resulting in impaired costimulation via CD28. Acquisition of CD86 from antigen-presenting cells is stimulated by T cell receptor engagement and observed in vitro and in vivo. These data reveal a mechanism of immune regulation in which CTLA-4 acts as an effector molecule to inhibit CD28 costimulation by the cell-extrinsic depletion of ligands, accounting for many of the known features of the CD28—CTLA-4 system.