This research investigates wood defects, particularly the formation of surface cracks, during the production of thermally modified wood and its exposure to cyclic moisture changes. Boards of Norway spruce and Scots pine originating from different steps within the production of ThermoWood® were collected and wood defects were investigated at macroscopic and microscopic scale. Subsequently, the wood was exposed to capillary wetting cycles to record its sensitivity towards cracking. After the modification process, typical anatomical defects of conventional kiln-drying became more frequent and severe, with the magnitude being to some extent depending on the presence of defects in the raw material. At microscopic scale, damages to ray parenchyma and epithelial cells as well as longitudinal cracks within the cell walls of earlywood tracheids were evident in thermally modified wood. Despite a lower water uptake and higher dimensional stability, thermally modified wood was more sensitive to surface cracking during wetting cycles than unmodified wood, i.e. at the outside face of outer boards (near bark). For limiting surface cracking of thermally modified wood during service life, the use of high-quality raw material, the exposure of the inside face of the boards (near pith) and the application of a surface coating are considered beneficial.