The function of several G protein-coupled receptors (GPCRs) exhibits cholesterol sensitivity. Cholesterol sensitivity of GPCRs could be attributed to specific sequence and structural features, such as the cholesterol recognition/interaction amino acid consensus (CRAC) motif, that facilitate their cholesterol-receptor interaction. In this work, we explored the molecular basis of cholesterol sensitivity exhibited by the serotonin receptor, the most studied GPCR in the context of cholesterol sensitivity, by generating mutants of key residues in CRAC motifs in transmembrane helix 2 (TM2) and TM5 of the receptor. Our results show that a lysine residue (K101) in one of the CRAC motifs is crucial for sensing altered membrane cholesterol levels. Insights from all-atom molecular dynamics simulations showed that cholesterol-sensitive functional states of the serotonin receptor are associated with reduced conformational dynamics of extracellular loops of the receptor. These results constitute one of the first reports on the molecular mechanism underlying cholesterol sensitivity of GPCRs.