diff --git a/doc/user-guide/src/environment-variables.md b/doc/user-guide/src/environment-variables.md
index a9669be902..a8240903dd 100644
--- a/doc/user-guide/src/environment-variables.md
+++ b/doc/user-guide/src/environment-variables.md
@@ -72,6 +72,8 @@
 - `RUSTUP_CONCURRENT_DOWNLOADS` *unstable* (default: the number of components to download). Controls the number of
   downloads made concurrently.
 
+- `RUSTUP_TOOLCHAIN_SOURCE`. Set by rustup to tell downstream tools how `RUSTUP_TOOLCHAIN` was determined.
+
 [directive syntax]: https://docs.rs/tracing-subscriber/latest/tracing_subscriber/filter/struct.EnvFilter.html#directives
 [dc]: https://docs.docker.com/storage/storagedriver/overlayfs-driver/#modifying-files-or-directories
 [override]: overrides.md
diff --git a/src/cli/proxy_mode.rs b/src/cli/proxy_mode.rs
index 1cb24f8252..67829a6058 100644
--- a/src/cli/proxy_mode.rs
+++ b/src/cli/proxy_mode.rs
@@ -5,8 +5,9 @@ use anyhow::Result;
 use crate::{
     cli::{common::set_globals, job, self_update},
     command::run_command_for_dir,
+    config::ActiveReason,
     process::Process,
-    toolchain::ResolvableLocalToolchainName,
+    toolchain::{ResolvableLocalToolchainName, maybe_set_env_source},
 };
 
 #[tracing::instrument(level = "trace", skip(process))]
@@ -24,6 +25,7 @@ pub async fn main(arg0: &str, current_dir: PathBuf, process: &Process) -> Result
         .filter(|arg| arg.starts_with('+'))
         .map(|name| ResolvableLocalToolchainName::try_from(&name.as_ref()[1..]))
         .transpose()?;
+    let toolchain_specified = toolchain.is_some();
 
     // Build command args now while we know whether or not to skip arg 1.
     let cmd_args: Vec<_> = process
@@ -32,9 +34,10 @@ pub async fn main(arg0: &str, current_dir: PathBuf, process: &Process) -> Result
         .collect();
 
     let cfg = set_globals(current_dir, true, process)?;
-    let cmd = cfg
-        .resolve_local_toolchain(toolchain)
-        .await?
-        .command(arg0)?;
+    let toolchain = cfg.resolve_local_toolchain(toolchain).await?;
+    let mut cmd = toolchain.command(arg0)?;
+    if toolchain_specified {
+        maybe_set_env_source(&mut cmd, || Some(ActiveReason::CommandLine));
+    }
     run_command_for_dir(cmd, arg0, &cmd_args)
 }
diff --git a/src/config.rs b/src/config.rs
index b4c574fdc7..bab759ea0b 100644
--- a/src/config.rs
+++ b/src/config.rs
@@ -102,6 +102,19 @@ pub(crate) enum ActiveReason {
     ToolchainFile(PathBuf),
 }
 
+impl ActiveReason {
+    /// Format `ActiveReason` for setting the `RUSTUP_TOOLCHAIN_SOURCE` environment variable.
+    pub fn to_source(&self) -> &str {
+        match self {
+            Self::Default => "default",
+            Self::Environment => "env",
+            Self::CommandLine => "cli",
+            Self::OverrideDB(_) => "override",
+            Self::ToolchainFile(_) => "config",
+        }
+    }
+}
+
 impl Display for ActiveReason {
     fn fmt(&self, f: &mut fmt::Formatter<'_>) -> std::result::Result<(), fmt::Error> {
         match self {
diff --git a/src/test/mock_bin_src.rs b/src/test/mock_bin_src.rs
index d85b8002cd..5ca84dba18 100644
--- a/src/test/mock_bin_src.rs
+++ b/src/test/mock_bin_src.rs
@@ -106,6 +106,14 @@ fn main() {
             let mut out = io::stderr();
             writeln!(out, "{}", std::env::current_exe().unwrap().display()).unwrap();
         }
+        Some("--echo-rustup-toolchain-source") => {
+            let mut out = io::stderr();
+            if let Ok(rustup_toolchain_source) = std::env::var("RUSTUP_TOOLCHAIN_SOURCE") {
+                writeln!(out, "{rustup_toolchain_source}").unwrap();
+            } else {
+                panic!("RUSTUP_TOOLCHAIN_SOURCE environment variable not set");
+            }
+        }
         arg => panic!("bad mock proxy commandline: {:?}", arg),
     }
 }
diff --git a/src/toolchain.rs b/src/toolchain.rs
index ad7183cfce..4599e39bb8 100644
--- a/src/toolchain.rs
+++ b/src/toolchain.rs
@@ -181,6 +181,14 @@ impl<'a> Toolchain<'a> {
 
         env_var::inc("RUST_RECURSION_COUNT", cmd, self.cfg.process);
 
+        maybe_set_env_source(cmd, || {
+            if let Ok(Some((_, reason))) = self.cfg.active_toolchain() {
+                Some(reason)
+            } else {
+                None
+            }
+        });
+
         cmd.env("RUSTUP_TOOLCHAIN", format!("{}", self.name));
         cmd.env("RUSTUP_HOME", &self.cfg.rustup_dir);
     }
@@ -605,3 +613,16 @@ impl<'a> Toolchain<'a> {
             .collect())
     }
 }
+
+/// Set the `RUSTUP_TOOLCHAIN_SOURCE` environment variable if not already set.
+///
+/// `RUSTUP_TOOLCHAIN_SOURCE` indicates how the toolchain was determined. The environment
+/// variable could have been set in proxy_mode.rs, in which case it should not be changed.
+pub(crate) fn maybe_set_env_source(cmd: &mut Command, f: impl FnOnce() -> Option<ActiveReason>) {
+    if env::var_os("RUSTUP_TOOLCHAIN_SOURCE").is_some() {
+        return;
+    }
+    if let Some(reason) = f() {
+        cmd.env("RUSTUP_TOOLCHAIN_SOURCE", reason.to_source());
+    }
+}
diff --git a/tests/suite/cli_rustup.rs b/tests/suite/cli_rustup.rs
index 7b1b0787dc..f59b92da95 100644
--- a/tests/suite/cli_rustup.rs
+++ b/tests/suite/cli_rustup.rs
@@ -3038,6 +3038,88 @@ error: no active toolchain
         .is_ok();
 }
 
+#[tokio::test]
+async fn rustup_toolchain_source_cli() {
+    let cx = CliTestContext::new(Scenario::SimpleV2).await;
+    cx.config
+        .expect(&["rustup", "install", "nightly"])
+        .await
+        .is_ok();
+    cx.config
+        .expect(["cargo", "+nightly", "--echo-rustup-toolchain-source"])
+        .await
+        .with_stderr(snapbox::str![[r#"
+...
+cli
+
+"#]]);
+}
+
+#[tokio::test]
+async fn rustup_toolchain_source_env() {
+    let cx = CliTestContext::new(Scenario::SimpleV2).await;
+    cx.config
+        .expect_with_env(
+            ["cargo", "--echo-rustup-toolchain-source"],
+            [("RUSTUP_TOOLCHAIN", "nightly")],
+        )
+        .await
+        .with_stderr(snapbox::str![[r#"
+...
+env
+
+"#]]);
+}
+
+#[tokio::test]
+async fn rustup_toolchain_source_override() {
+    let cx = CliTestContext::new(Scenario::SimpleV2).await;
+    cx.config
+        .expect(["rustup", "override", "set", "nightly"])
+        .await
+        .is_ok();
+    cx.config
+        .expect(["cargo", "--echo-rustup-toolchain-source"])
+        .await
+        .with_stderr(snapbox::str![[r#"
+...
+override
+
+"#]]);
+}
+
+#[tokio::test]
+async fn rustup_toolchain_source_config() {
+    let cx = CliTestContext::new(Scenario::SimpleV2).await;
+    let toolchain_file = cx.config.current_dir().join("rust-toolchain.toml");
+    raw::write_file(&toolchain_file, "[toolchain]\nchannel='nightly'").unwrap();
+    cx.config
+        .expect(["cargo", "--echo-rustup-toolchain-source"])
+        .await
+        .with_stderr(snapbox::str![[r#"
+...
+config
+
+"#]]);
+}
+
+#[tokio::test]
+async fn rustup_toolchain_source_default() {
+    let cx = CliTestContext::new(Scenario::SimpleV2).await;
+    cx.config
+        .expect(&["rustup", "default", "stable"])
+        .await
+        .is_ok();
+    cx.config
+        .expect(["cargo", "--echo-rustup-toolchain-source"])
+        .await
+        .with_stderr(snapbox::str![[r#"
+...
+default
+
+"#]]);
+}
+
 #[tokio::test]
 async fn directory_override_doesnt_need_to_exist_unless_it_is_selected() {
     let cx = CliTestContext::new(Scenario::SimpleV2).await;