The molecular mechanisms whereby CD8+ T cells become "exhausted" in the tumor microenvironment remain unclear. Programmed death ligand-1 (PD-L1) is upregulated on tumor cells and PD-1-PD-L1 blockade has significant efficacy in human tumors; however, most patients do not respond, suggesting additional mechanisms underlying T cell exhaustion. B7 superfamily member 1 (B7S1), also called B7-H4, B7x, or VTCN1, negatively regulates T cell activation. Here we show increased B7S1 expression on myeloid cells from human hepatocellular carcinoma correlated with CD8+ T cell dysfunction. B7S1 inhibition suppressed development of murine tumors. Putative B7S1 receptor was co-expressed with PD-1 but not T cell immunoglobulin and mucin-domain containing-3 (Tim-3) at an activated state of early tumor-infiltrating CD8+ T cells, and B7S1 promoted T cell exhaustion, possibly through Eomes overexpression. Combinatorial blockade of B7S1 and PD-1 synergistically enhanced anti-tumor immune responses. Collectively, B7S1 initiates dysfunction of tumor-infiltrating CD8+ T cells and may be targeted for cancer immunotherapy.