Abstract Background Hypoxia is pervasive in cancer and other diseases. Cells sense and adapt to hypoxia by activating hypoxia-inducible transcription factors (HIFs), but it is still an outstanding question why cell types differ in their transcriptional response to hypoxia. Results We report that HIFs fail to bind CpG dinucleotides that are methylated in their consensus binding sequence, both in in vitro biochemical binding assays and in vivo studies of differentially methylated isogenic cell lines. Based on in silico structural modeling, we show that 5-methylcytosine indeed causes steric hindrance in the HIF binding pocket. A model wherein cell-type-specific methylation landscapes, as laid down by the differential expression and binding of other transcription factors under normoxia, control cell-type-specific hypoxia responses is observed. We also discover ectopic HIF binding sites in repeat regions which are normally methylated. Genetic and pharmacological DNA demethylation, but also cancer-associated DNA hypomethylation, expose these binding sites, inducing HIF-dependent expression of cryptic transcripts. In line with such cryptic transcripts being more prone to cause double-stranded RNA and viral mimicry, we observe low DNA methylation and high cryptic transcript expression in tumors with high immune checkpoint expression, but not in tumors with low immune checkpoint expression, where they would compromise tumor immunotolerance. In a low-immunogenic tumor model, DNA demethylation upregulates cryptic transcript expression in a HIF-dependent manner, causing immune activation and reducing tumor growth. Conclusions Our data elucidate the mechanism underlying cell-type-specific responses to hypoxia and suggest DNA methylation and hypoxia to underlie tumor immunotolerance.