The common γ-chain (γc) plays a central role in signaling by IL-2 and other γc-dependent cytokines. Here we report that activated T cells produce an alternatively spliced form of γc mRNA that results in protein expression and secretion of the γc extracellular domain. The soluble form of γc (sγc) is present in serum and directly binds to IL-2Rβ and IL-7Rα proteins on T cells to inhibit cytokine signaling and promote inflammation. sγc suppressed IL-7 signaling to impair naive T cell survival during homeostasis and exacerbated Th17-cell-mediated inflammation by inhibiting IL-2 signaling upon T cell activation. Reciprocally, the severity of Th17-cell-mediated inflammatory diseases was markedly diminished in mice lacking sγc. Thus, sγc expression is a naturally occurring immunomodulator that regulates γc cytokine signaling and controls T cell activation and differentiation.