Brain function depends on interaction of diverse cell types whose gene expression and identity are defined, in part, by epigenetic mechanisms. Neuronal DNA contains two major epigenetic modifications, methylcytosine (mC) and hydroxymethylcytosine (hmC), yet their cell type-specific landscapes and relationship with gene expression are poorly understood. We report high-resolution (h)mC analyses, together with transcriptome and histone modification profiling, in three major cell types in human prefrontal cortex: glutamatergic excitatory neurons, medial ganglionic eminence-derived g-aminobutyric acid (GABA)ergic inhibitory neurons, and oligodendrocytes. We detected a unique association between hmC and gene expression in inhibitory neurons that differed significantly from the pattern in excitatory neurons and oligodendrocytes. We also found that risk loci associated with neuropsychiatric diseases were enriched near regions of reduced hmC in excitatory neurons and reduced mC in inhibitory neurons. Our findings indicate differential roles for mC and hmC in regulation of gene expression in different brain cell types, with implications for the etiology of human brain diseases.