Brain-derived neurotrophic factor (BDNF) regulates neuronal differentiation, synaptic plasticity, and morphology, and modest changes in BDNF levels results in complex behavioral phenotypes. BDNF levels and intracellular localization in neurons are regulated by multiple mechanisms, including use of distinct promoters, mRNA and protein transport, and regulated cleavage of proBDNF to mature BDNF. Sortilin is an intracellular chaperone that binds to the prodomain of BDNF to traffic it to the regulated secretory pathway. However, sortilin binds to numerous ligands and plays a major role in mannose 6-phosphate receptor-independent transport of lysosomal hydrolases utilizing motifs in the intracellular domain that mediate trafficking from the Golgi and late endosomes. Sortilin is modified by ectodomain shedding, although the biological implications of this are not known. Here we demonstrate that ADAM10 is the preferred protease to cleave sortilin in the extracellular stalk region, to release the ligand binding sortilin ectodomain from the transmembrane and cytoplasmic domains. We identify sortilin shedding at the cell surface and in an intracellular compartment. Both sortilin and BDNF are trafficked to and degraded by the lysosome in neurons, and this is dependent upon the sortilin cytoplasmic tail. Indeed, expression of the sortilin ectodomain, which corresponds to the domain released after shedding, impairs lysosomal targeting and degradation of BDNF. These findings characterize the regulation of sortilin shedding and identify a novel mechanism by which sortilin ectodomain shedding acts as a regulatory switch for delivery of BDNF to the secretory pathway or to the lysosome, thus modulating the bioavailability of endogenous BDNF.