Type A γ-aminobutyric acid receptors (GABAARs) are the principal mediators of inhibitory neurotransmission in the human brain. Endogenous neurosteroids interact with GABAARs to regulate acute and chronic anxiety and are potent sedative, analgesic, anticonvulsant and anesthetic agents. Their mode of binding and mechanism of receptor potentiation, however, remain unknown. Here we report crystal structures of a chimeric GABAAR construct in apo and pregnanolone-bound states. The neurosteroid-binding site is mechanically coupled to the helices lining the ion channel pore and modulates the desensitization-gate conformation. We demonstrate that the equivalent site is responsible for physiological, heteromeric GABAAR potentiation and explain the contrasting modulatory properties of 3a versus 3b neurosteroid epimers. These results illustrate how peripheral lipid ligands can regulate the desensitization gate of GABAARs, a process of broad relevance to pentameric ligand-gated ion channels.