Activation of the RIG-I-like receptors, retinoic-acid inducible gene I (RIG-I) and melanoma differentiation-associated protein 5 (MDA5), establishes an antiviral state by upregulating interferon (IFN)-stimulated genes (ISGs). Among these is ISG15, the mechanistic roles of which in innate immunity still remain enigmatic. In the present study, we report that ISG15 conjugation is essential for antiviral IFN responses mediated by the viral RNA sensor MDA5. ISGylation of the caspase activation and recruitment domains of MDA5 promotes its oligomerization and thereby triggers activation of innate immunity against a range of viruses, including coronaviruses, flaviviruses and picornaviruses. The ISG15-dependent activation of MDA5 is antagonized through direct de-ISGylation mediated by the papain-like protease of SARS-CoV-2, a recently emerged coronavirus that has caused the COVID-19 pandemic. Our work demonstrates a crucial role for ISG15 in the MDA5-mediated antiviral response, and also identifies a key immune evasion mechanism of SARS-CoV-2, which may be targeted for the development of new antivirals and vaccines to combat COVID-19.