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The main risk in working with celluloid is fire.  Celluloid will burn vigorously if ignited!  Thicker pieces of celluloid must be cut with a wet saw; a slow, cautious rate of feed and the use of liquid coolant are strongly recommended for any power sawing involving celluloid.  Grinding and power sanding should also be done with caution, taking all necessary measures to insure that the material is not overheated.  Drilling should be done at slow speeds, an inch or less at a time, backing the drill bit out regularly to allow both drill and workpiece to cool.  Paraffin is a useful lubricant and coolant for drilling.  Celluloid can be turned on a wood lathe, but take care to keep your tools sharp and your touch light.  The risk of overheating a workpiece is generally significantly greater on a wood lathe than on a metal lathe.  Every workshop should have a fire extinguisher handy, and this is particularly important in any shop where celluloid is worked.

Celluloid fell out of common usage so long ago that most recently-compiled safety data sheets are less than reliable.  In many cases, information has been taken from data sheets for chemically related but very different materials, including what is essentially raw, unstabilized guncotton!

A more reliable Chemical Datasheet may be found here, at a site developed by the NOAA in partnership with the EPA and the USCG.  Supplementary material appears below; the information is largely drawn from Worden's encyclopedic Nitrocellulose Industry.

Slight odor of camphor
Specific gravity: 1.3-1.5, exclusive of pigment (may be up to 60% of total weight)
Combustion velocity 5x that of paper, caloric content similar to dry white pine or brown coal
Flash point: N/A
Soluble in acetone, amyl acetate, methyl and ethyl acetate, higher ketones, acetic acid
Partially soluble (camphor dissolves) in benzine, ether, toluene, xylene

Celluloid was the dominant material for the manufacture of fountain pens from the mid-1920s up through the 1940s.  Since old pens were often assembled using sealants that release when warmed, we can draw upon a considerable body of experience in vintage pen repair for guidance regarding celluloid and heat.

Celluloid will burn if overheated.  An old pen held too long over a heat gun will typically start to smoke and fizz, burning with little flame at a pace like that of a firecracker fuse.  Thinner pieces of celluloid will tend to flare up more.  A fire involving a larger quantity of celluloid may require more sophisticated measures, but a single burning celluloid pen barrel can be quickly extinguished by dunking in a can of water. 

It is a bad idea to breathe the smoke from ANY burning plastic.  If you do have an accident, thoroughly ventilate the shop before returning to work.

Do not let celluloid dust, shavings, or scrap accumulate in your workshop!  Finely-divided celluloid is a significant fire hazard, and will ignite much more easily and burn much more violently than the solid material.  Smoking around celluloid scrap is very unwise, as is storage of flammable liquids near celluloid.

Wearing a dust mask or respirator is advisable whenever plastic dust of any sort is in the air.  Celluloid dust appears to be more of an irritant than a toxin.  Note that celluloid is not just nitrocellose - it is typically 23 to 33% camphor by weight.  Though many of us grew up with camphor-bearing medicines, too much camphor can be harmful; read more about camphor here; a CDC data sheet for camphor may be consulted here.  

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