The serotonin transporter (SERT) is important for reuptake of the neurotransmitter serotonin from the synaptic cleft and is also the target of most antidepressants. It has previously been shown that cholesterol in the membrane bilayer affects the conformation of the serotonin transporter. Although recent crystal structures have identified several potential cholesterol binding sites it is unclear whether any of these potential cholesterol sites are occupieed by cholesterol and functionally relevant. In the present study we focus on the conserved Cholesterol Site 1 (CHOL1) located in a hydrophobic groove between TM1a, TM5 and TM7. By molecular dynamics simulations we demonstrate a strong binding of cholesterol to CHOL1 in a membrane bilayer environment. In biochemical experiments we find that cholesterol depletion induces a more inward-facing conformation favoring substrate analog binding. Consistent with this, we find that mutations in CHOL1 with a negative impact on cholesterol binding induce a more inward-facing conformation and vice versa mutations with a positive impact on cholesterol binding induce a more outward-facing conformation. This shift in transporter conformation dictated by the ability to bind cholesterol in CHOL1 affects the apparent substrate affinity, maximum transport velocity and turn-over rates. Taken together we show that occupation of CHOL1 by cholesterol is of major importance in the transporter conformational equilibrium which in turn dictates ligand potency and serotonin transport activity. Based on our findings, we propose a mechanistic model that incorporates the role of cholesterol binding to CHOL1 in the function of SERT.