Abstract Background The regular mammalian X and Y chromosomes diverged from each other at least 166 to 148 million years ago, leaving few traces of their early evolution, including degeneration of the Y chromosome and evolution of dosage compensation. Results We studied the intriguing case of black muntjac, in which a recent X-autosome fusion and a subsequent large autosomal inversion within just the past 0.5 million years have led to inheritance patterns identical to the traditional X-Y (neo-sex chromosomes). We compared patterns of genome evolution in 35-kilobase noncoding regions and 23 gene pairs on the homologous neo-sex chromosomes. We found that neo-Y alleles have accumulated more mutations, comprising a wide variety of mutation types, which indicates cessation of recombination and is consistent with an ongoing neo-Y degeneration process. Putative deleterious mutations were observed in coding regions of eight investigated genes as well as cis -regulatory regions of two housekeeping genes. In vivo assays characterized a neo-Y insertion in the promoter of the CLTC gene that causes a significant reduction in allelic expression. A neo-Y-linked deletion in the 3'-untranslated region of gene SNX22 abolished a microRNA target site. Finally, expression analyses revealed complex patterns of expression divergence between neo-Y and neo-X alleles. Conclusion The nascent neo-sex chromosome system of black muntjacs is a valuable model in which to study the evolution of sex chromosomes in mammals. Our results illustrate the degeneration scenarios in various genomic regions. Of particular importance, we report - for the first time - that regulatory mutations were probably able to accelerate the degeneration process of Y and contribute to further evolution of dosage compensation.