Electronic doping of colloidal semiconductor nanostructures holds promise for future device concepts in optoelectronic and spin-based technologies. Ag⁺ is an emerging electronic dopant in iii–v and ii–vi nanostructures, introducing intragap electronic states optically coupled to the host conduction band. With its full 4d shell Ag⁺ is nonmagnetic, and the dopant-related luminescence is ascribed to decay of the conduction-band electron following transfer of the photoexcited hole to Ag⁺. This optical activation process and the associated modification of the electronic configuration of Ag⁺ remain unclear. Here, we trace a comprehensive picture of the excitonic process in Ag-doped CdSe nanocrystals and demonstrate that, in contrast to expectations, capture of the photohole leads to conversion of Ag⁺ to paramagnetic Ag²⁺. The process of exciton recombination is thus inextricably tied to photoinduced magnetism. Accordingly, we observe strong optically activated magnetism and diluted magnetic semiconductor behaviour, demonstrating that optically switchable magnetic nanomaterials can be obtained by exploiting excitonic processes involving nonmagnetic impurities.