Aggregation of the multifunctional RNA-binding protein TDP-43 defines large subgroups of amyotrophic lateral sclerosis and frontotemporal dementia and correlates with neurodegeneration in both diseases. In disease, characteristic C-terminal fragments of ~25 kDa ("TDP-25") accumulate in cytoplasmic inclusions. Here, we analyze gain-of-function mechanisms of TDP-25 combining cryo-electron tomography, proteomics, and functional assays. In neurons, cytoplasmic TDP-25 inclusions are amorphous, and photobleaching experiments reveal gel-like biophysical properties that are less dynamic than nuclear TDP-43. Compared with full-length TDP-43, the TDP-25 interactome is depleted of low-complexity domain proteins. TDP-25 inclusions are enriched in 26S proteasomes adopting exclusively substrate-processing conformations, suggesting that inclusions sequester proteasomes, which are largely stalled and no longer undergo the cyclic conformational changes required for proteolytic activity. Reporter assays confirm that TDP-25 impairs proteostasis, and this inhibitory function is enhanced by ALS-causing TDP-43 mutations. These findings support a patho-physiological relevance of proteasome dysfunction in ALS/FTD.