Small RNAs can be engineered to target and eliminate expression of disease-causing genes or infectious viruses, resulting in the preclinical and clinical development of RNA interference (RNAi) therapeutics using these small RNAs. To ensure the success of RNAi therapeutics, small hairpin RNAs (shRNAs) must co-opt sufficient quantities of the endogenous microRNA machinery to elicit efficient gene knockdown without impeding normal cellular function. We previously observed liver toxicity-including hepatocyte turnover, loss of gene repression and lethality-in mice receiving high doses of a recombinant adeno-associated virus (rAAV) vector expressing shRNAs (rAAV-shRNAs); however the mechanism by which toxicity ensues has not been elucidated. Using rAAV-shRNAs we have now determined that hepatotoxicity arises when exogenous shRNAs exceed 12% of the total amount of liver microRNAs. After this threshold was surpassed, shRNAs specifically reduced the initially synthesized 22-nucleotide isoform of microRNA (miR)-122-5p without substantially affecting other microRNAs, resulting in functional de-repression of miR-122 target mRNAs. Delivery of a rAAV-shRNA vector expressing mature miR-122-5p could circumvent toxicity, despite the exogenous shRNA accounting for 70% of microRNAs. Toxicity was also not observed in Mir122-knockout mice regardless of the level or sequence of the shRNA. Our study establishes limits to the microRNA machinery that is available for therapeutic siRNAs and suggests new paradigms for the role of miR-122 in liver homeostasis in mice.