Development of coal‐bed natural gas (CBNG) in the Powder River Basin, Wyoming, has increased substantially in recent years. Among environmental concerns associated with this development is the fate of groundwater removed with the gas. A preferred water‐management option is storage in surface impoundments. As of January 2007, permits for more than 4000 impoundments had been issued within Wyoming. A study was conducted on changes in water and sediment chemistry as water from an impoundment infiltrated the subsurface. Sediment cores were collected prior to operation of the impoundment and after its closure and reclamation. Suction lysimeters were used to collect water samples from beneath the impoundment. Large amounts of chloride (12,300 kg) and nitrate (13,500 kg as N), most of which accumulated naturally in the sediments over thousands of years, were released into groundwater by infiltrating water. Nitrate was more readily flushed from the sediments than chloride. If sediments at other impoundment locations contain similar amounts of chloride and nitrate, impoundments already permitted could release over 48 × 10⁶ kg of chloride and 52 × 10⁶ kg of nitrate into groundwater in the basin. A solute plume with total dissolved solid (TDS) concentrations at times exceeding 100,000 mg/L was created in the subsurface. TDS concentrations in the plume were substantially greater than those in the CBNG water (about 2300 mg/L) and in the ambient shallow groundwater (about 8000 mg/L). Sulfate, sodium, and magnesium are the dominant ions in the plume. The elevated concentrations are attributed to cation‐exchange‐enhanced gypsum dissolution. As gypsum dissolves, calcium goes into solution and is exchanged for sodium and magnesium on clays. Removal of calcium from solution allows further gypsum dissolution.