Some species of Inocybes. str. caused neurotoxic poisoning after consumption around the world. However, there are a large number of species in this genus that have not been studied for their toxicity or toxin content. In this study, we report two new toxic yellow Inocybes. str. species from China based on morphological characteristics, phylogenetic analyses and toxin detection. Among the two species, Inocybe squarrosolutea is reported as a newly recorded species of China. We also describe a new species, I. squarrosofulva, which is morphologically similar to I. squarrosolutea. The new species is characterized by its ochraceous squarrose pileus, distinctly annulate cortina on the stipe, nodulose basidiospores and thick-walled pleurocystidia. Muscarine in the fruitbodies was detected by UPLC–MS/MS, the content in I. squarrosolutea and I. squarrosofulva were 136.4 ± 25.4 to 1683.0 ± 313 mg/kg dry weight and 31.2 ± 5.8 to 101.8 ± 18.9 mg/kg dry weight, respectively.