Nitrification and nitrate reduction were examined in an ephemeral drainage channel receiving discharge from coalbed natural gas (CBNG) production wells in the Powder River Basin, Wyoming. CBNG co-produced water typically contains dissolved inorganic nitrogen (DIN), primarily as ammonium. In this study, a substantial portion of discharged ammonium was oxidized within 50 m of downstream transport, but speciation was markedly influenced by diel fluctuations in dissolved oxygen (> 300 µM). After 300 m of transport, 60% of the initial DIN load had been removed. The effect of benthic nitrogen-cycling processes on stream water chemistry was assessed at 2 locations within the stream channel using acrylic chambers to conduct short-term (2–6 h), in-stream incubations. The highest ambient DIN removal rates (2103 µmol N m^− 2h^− 1) were found at a location where ammonium concentrations > 350 µM. This occurred during light incubations when oxygen concentrations were highest. Nitrification was occurring at the site, however, net accumulation of nitrate and nitrite accounted for < 12% of the ammonium consumed, indicating that other ammonium-consuming processes were also occurring. In dark incubations, nitrite and nitrate consumption were dominant processes, while ammonium was produced rather than consumed. At a downstream location nitrification was not a factor and changes in DIN removal rates were controlled by nitrate reduction, diel fluctuations in oxygen concentration, and availability of electron donor. This study indicates that short-term adaptation of stream channel processes can be effective for removing CBNG DIN loads given sufficient travel distances, but the long-term potential for nitrogen remobilization and nitrogen saturation remain to be determined.