Endogenous formaldehyde is produced by numerous biochemical pathways fundamental to life, and it can crosslink both DNA and proteins. However, the consequences of its accumulation are unclear. Here we show that endogenous formaldehyde is removed by the enzyme alcohol dehydrogenase 5 (ADH5/GSNOR), and Adh5^−/− mice therefore accumulate formaldehyde adducts in DNA. The repair of this damage is mediated by FANCD2, a DNA crosslink repair protein. Adh5^−/−Fancd2^−/− mice reveal an essential requirement for these protection mechanisms in hematopoietic stem cells (HSCs), leading to their depletion and precipitating bone marrow failure. More widespread formaldehyde-induced DNA damage also causes karyomegaly and dysfunction of hepatocytes and nephrons. Bone marrow transplantation not only rescued hematopoiesis but, surprisingly, also preserved nephron function. Nevertheless, all of these animals eventually developed fatal malignancies. Formaldehyde is therefore an important source of endogenous DNA damage that is counteracted in mammals by a conserved protection mechanism.