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Estuaries emit a large but highly uncertain amount of Nitrous oxide (N₂O) into the atmosphere. To better understand N₂O cycling processes in estuaries, we provide the first direct observations of N₂O consumption in the seasonally anoxic Chesapeake Bay, the largest estuary in the United States. N₂O consumption rates in anoxic waters reached up to 3.3 nmol L⁻¹ d⁻¹but were generally undetectable in oxygenated waters. However, N₂O consumption rates were substantially enhanced when the oxygen concentration was experimentally decreased in initially oxygenated samples, indicating the potential of N₂O consumption in oxygenated environments, for example, surface waters. These potential N₂O consumption rates followed Michaelis‐Menten kinetics as a function of increasing N₂O substrate concentration. N₂O‐consuming microbes that predominantly contained the clade II nitrous oxide reductase gene were detected throughout the water column. These new observations of environmental controls on N₂O consumption will benefit the modeling of N₂O cycling and help to constrain the estuarine N₂O flux.