The loss of transglutaminase 1 enzyme (TGase 1) activity causes lamellar ichthyosis. Recessive X-linked ichthyosis (XI) results from accumulation of excess cholesterol 3-sulfate (CSO(4)) in the epidermis but the pathomechanism how elevated epidermal CSO(4) causes ichthyosis is largely unknown. Here we provide evidence that XI is also a consequence of TGase 1 dysfunction. TGase 1 is a key component of barrier formation in keratinocytes: it participates in the cross-linking of cell envelope (CE) structural proteins, and also forms the lipid bound envelope by esterification of long chain omega-hydroxyceramides onto CE proteins. Using involucrin and an epidermal omega-hydroxyceramide analog as substrates, kinetic analyses revealed that at membrane concentrations above 4 mol %, CSO(4) caused a marked and dose-dependent inhibitory effect on isopeptide and ester bond formation. Sequencing of tryptic peptides from TGase 1-reacted involucrin showed a large increase in deamidation of substrate glutamines. We hypothesize that supraphysiological levels of CSO(4) in keratinocyte membranes distort the structure of TGase 1 and facilitate the access of water into its active site causing hydrolysis of substrate glutamine residues. Our findings provide further evidence for the pivotal role of the TGase 1 enzyme in CE formation.