Bogs are globally important sinks of atmospheric carbon (C) due to the accumulation of partially decomposed litter that forms peat. Because bogs receive their nutrients from the atmosphere, the world-wide increase of nitrogen (N) deposition is expected to affect litter decomposition and, ultimately, the rate of C accumulation. However, the mechanism of such biogeochemical alteration remains unclear and quantification of the effect of N addition on litter accumulation has yet to be done. Here, we show that 7 years of N addition to a bog decreased the C: N ratio, increased the bacterial biomass and stimulated the activity of hydrolytic and oxidative enzymes in surface peat. Furthermore, N addition modified nutrient limitation of microbes during litter decomposition so that phosphorus became a primary limiting nutrient. Alteration of N release from decomposing litter affected bog water chemistry and the competitive balance between peat-forming mosses and vascular plants. We estimate that deposition of about 4 g N m−2 yr−1 will cause a mean annual reduction of fresh litter C accumulation of about 40 g m−2 primarily as a consequence of decreased litter production from peat-forming mosses. Our findings show that N deposition interacts with both above and below ground components of biodiversity to threaten the ability of bogs to act as N-sinks, which may offset the positive effects of N on C accumulation seen in other ecosystems.