Ubiquitin linkage to cysteine is an unconventional modification targeting protein for degradation. However, the physiological regulation of cysteine ubiquitylation is still mysterious. Here we found that ACAT2, a cellular enzyme converting cholesterol and fatty acid to cholesteryl esters, was ubiquitylated on Cys277 for degradation when the lipid level was low. gp78-Insigs catalysed Lys48-linked polyubiquitylation on this Cys277. A high concentration of cholesterol and fatty acid, however, induced cellular reactive oxygen species (ROS) that oxidized Cys277, resulting in ACAT2 stabilization and subsequently elevated cholesteryl esters. Furthermore, ACAT2 knockout mice were more susceptible to high-fat diet-associated insulin resistance. By contrast, expression of a constitutively stable form of ACAT2 (C277A) resulted in higher insulin sensitivity. Together, these data indicate that lipid-induced stabilization of ACAT2 ameliorates lipotoxicity from excessive cholesterol and fatty acid. This unconventional cysteine ubiquitylation of ACAT2 constitutes an important mechanism for sensing lipid-overload-induced ROS and fine-tuning lipid homeostasis.