Key points Extraction of cholesterol from synaptic vesicles trapped on the presynaptic plasma membrane causes synaptic vesicle proteins to disperse after exocytosis. Vesicular cholesterol regulates both presynaptic phosphatidylinositol (4,5)‐bisphosphate levels and actin distribution during synaptic vesicle recycling. Inhibition of actin polymerization results in the dispersal of proteins from trapped synaptic vesicles and impairs synaptic vesicle recycling. Vesicular cholesterol and actin together confine synaptic vesicle proteins on the presynaptic plasma membrane during synaptic vesicle recycling. Alteration of membrane or synaptic vesicle lipids might therefore affect the ability of synapses to undergo sustained exocytosis and endocytosis by compromising the recycling of synaptic vesicle proteins. Abstract Synaptic vesicles (SVs) and their proteins must be recycled for sustained synaptic transmission. We tested the hypothesis that SV cholesterol is required for proper sorting of SV proteins during recycling in live presynaptic terminals. We used the reversible block of endocytosis in the Drosophila temperature‐sensitive dynamin mutant shibire‐ts1 to trap exocytosed SV proteins, and then examined the effect of experimental treatments on the distribution of these proteins within the presynaptic plasma membrane by confocal microscopy. SV proteins synaptotagmin, vglut and csp were clustered following SV trapping in control experiments but dispersed in samples treated with the cholesterol chelator methyl‐β‐cyclodextrin to extract SV cholesterol. There was accumulation of phosphatidylinositol (4,5)‐bisphosphate (PIP2) in presynaptic terminals following SV trapping and this was reduced following SV cholesterol extraction. Reduced PIP2 accumulation was associated with disrupted accumulation of actin in presynaptic terminals. Similar to vesicular cholesterol extraction, disruption of actin by latrunculin A after SV proteins had been trapped on the plasma membrane resulted in the dispersal of SV proteins and prevented recovery of synaptic transmission due to impaired endocytosis following relief of the endocytic block. Our results demonstrate that vesicular cholesterol is required for aggregation of exocytosed SV proteins in the presynaptic plasma membrane and are consistent with a mechanism involving regulation of PIP2 accumulation and local actin polymerization by cholesterol. Thus, alteration of membrane or SV lipids may affect the ability of synapses to undergo sustained synaptic transmission by compromising the recycling of SV proteins.