Keloids are red, elevated scars that can develop from wounds because of subsequent dermal inflammation. We report a rare case of keloid formation within the nail mesenchyme of a 13-year-old girl after she sustained an injurious separation of the distal phalanx metaphysis of her toe. The patient was treated conservatively. Twelve months following her injury, she noticed a mass beginning to form within the nail epithelium. The mass was surgically resected 5 months later. The pathological diagnosis was a keloid as no acanthosis or keratosis was observed. Distal phalanx fractures are compound fractures that frequently cause the development of cellulitis and subsequent osteomyelitis, which provide the required conditions for keloid development. The nail mesenchyme comprises two distinct compartments: the hypodermis and matrical dermis. The present case demonstrates keloid development arising from the matrical dermis of the nail mesenchyme after sustaining a compound fracture of the underlying phalanx.