In-depth investigation of the microscale deformation behavior of ZnAlMg coatings is essential to reveal the origin and mechanism of cracking in these coatings. In this work anisotropic microstructural damage and cracking of multiphase Zn1.8Al1.8Mg alloy coatings produced by hot-dip galvanization process on a steel substrate have been studied extensively. Nanoindentation coupled with orientation image microscopy (OIM) is utilized to determine the local micro ductility/strength of the existing phases as well as the orientation dependent micromechanical properties of primary zinc grains. Plastic deformation and damage behavior of the coating are evaluated through in-situ tensile/bending tests, micro-digital image correlation and in-situ OIM analyses. Stress distribution fields and nucleation sites of cracks within the coating microstructure are investigated using extended finite element method. Three quantitative plastic deformation-based criteria are revealed to correlate the coating microstructure to micro-mechanical properties to comprehend the cracking phenomenon. In particular, the binary eutectic is identified as the most detrimental constituent for compatible plastic deformation. Local strain hardening exponent and Schmid factor of primary zinc grains are found to play a significant role in clarifying the cracking behavior. The results of this study are considered as an important step towards designing microstructure controlled ZnAlMg coatings with superior formability.