Herein we report the mechanism of human acid ceramidase (AC; N-acylsphingosine deacylase) cleavage and activation. A highly purified, recombinant human AC precursor underwent self-cleavage into alpha and beta subunits, similar to other members of the N-terminal nucleophile hydrolase superfamily. This reaction proceeded with first order kinetics, characteristic of self-cleavage. AC self-cleavage occurred most rapidly at acidic pH, but also at neutral pH. Site-directed mutagenesis and expression studies demonstrated that Cys-143 was an essential nucleophile that was required at the cleavage site. Other amino acids participating in AC cleavage included Arg-159 and Asp-162. Mutations at these three amino acids prevented AC cleavage and activity, the latter assessed using BODIPY-conjugated ceramide. We propose the following mechanism for AC self-cleavage and activation. Asp-162 likely forms a hydrogen bond with Cys-143, initiating a conformational change that allows Arg-159 to act as a proton acceptor. This, in turn, facilitates an intermediate thioether bond between Cys-143 and Ile-142, the site of AC cleavage. Hydrolysis of this bond is catalyzed by water. Treatment of recombinant AC with the cysteine protease inhibitor, methyl methanethiosulfonate, inhibited both cleavage and enzymatic activity, further indicating that cysteine-mediated self-cleavage is required for ceramide hydrolysis.