The biological function and disease association of human endogenous retroviruses (HERVs) are largely elusive. HERV-K(HML-2) has been associated with neurotoxicity, but there is no clear understanding of its role or mechanistic basis. We addressed the physiological functions of HERV-K(HML-2) in neuronal differentiation using CRISPR engineering to activate or repress its expression levels in a human-pluripotent-stem-cell-based system. We found that elevated HERV-K(HML-2) transcription is detrimental for the development and function of cortical neurons. These effects are cell-type-specific, as dopaminergic neurons are unaffected. Moreover, high HERV-K(HML-2) transcription alters cortical layer formation in forebrain organoids. HERV-K(HML-2) transcriptional activation leads to hyperactivation of NTRK3 expression and other neurodegeneration-related genes. Direct activation of NTRK3 phenotypically resembles HERV-K(HML-2) induction, and reducing NTRK3 levels in context of HERV-K(HML-2) induction restores cortical neuron differentiation. Hence, these findings unravel a cell-type-specific role for HERV-K(HML-2) in cortical neuron development.