Changes in cholesterol content of neuronal membranes occur during development and brain aging. Little is known about whether synaptic activity regulates cholesterol levels in neuronal membranes and whether these changes affect neuronal development and function. We generated transgenic flies that express the cholesterol-binding D4H domain of perfringolysin O toxin and found increased levels of cholesterol in presynaptic terminals of Drosophila larval neuromuscular junctions following increased synaptic activity. Reduced cholesterol impaired synaptic growth and largely prevented activity-dependent synaptic growth. Presynaptic knockdown of adenylyl cyclase phenocopied the impaired synaptic growth caused by reducing cholesterol. Furthermore, the effects of knocking down adenylyl cyclase and reducing cholesterol were not additive, suggesting that they function in the same pathway. Increasing cAMP levels using a dunce mutant with reduced phosphodiesterase activity failed to rescue this impaired synaptic growth, suggesting that cholesterol functions downstream of cAMP. We used a protein kinase A (PKA) sensor to show that reducing cholesterol levels reduced presynaptic PKA activity. Collectively, our results demonstrate that enhanced synaptic activity increased cholesterol levels in presynaptic terminals and that these changes likely activate the cAMP-PKA pathway during activity-dependent growth.