In this paper, the microstructural damage evolution of a steel with a ferrite–pearlite microstructure (C45E) was investigated during the process of cold upsetting. The development and the accumulation of microstructural damage were analyzed in different areas of samples that were deformed at different strain levels. The scanning electron microscopy (SEM) results showed that various mechanisms of nucleation of microcavities occurred during the upsetting process. In quantitative terms, microcavities were predominantly generated in pearlite colonies due to the fracture of cementite lamellae. In addition, the mechanism of decohesion had a significant influence on the development of a macroscopic crack, since a high level of microcracks, especially at higher degrees of deformation, was observed at the ferrite/pearlite or ferrite/ferrite interfaces. It was found that the distribution of microcavities along the equatorial plane of the sample was not uniform, as the density of microcavities increased with increasing strain level. The influence of stress state, i.e., stress triaxiality, on the nucleation and distribution of microcracks, was also analyzed.