Arctic warming leads to longer open-water periods, intensified storms, and rising relative sea level, which accelerate permafrost coastline erosion and enhance the lateral transport of sediment and organic matter (OM) from land to sea. Lagoons and embayments are widespread along Arctic coasts, and are located at the heart of the land-sea transition zone, yet their role in OM cycling remains poorly understood. Here, we assess the function of the Kanivaliuraq lagoon (Ptarmigan Bay, western Canadian Arctic) as a biogeochemical reactor for terrestrial OM. We combine shoreline position changes (1950–2018) with sediment core and surface sediment transect sampling to quantify sources, pathways, and trajectories of OM and sediments. Samples were analyzed for total organic carbon (TOC), total nitrogen, stable carbon isotopes (δ¹³C), mineral surface area, and grain size, complemented by sedimentation rates from 210Pb/137Cs dating and water turbidity dynamics from Landsat imagery. We find that OM content declines by more than 50 % along the land–lagoon–ocean gradient, both in TOC (% dry weight) and OC loading (mg OC m^-2), indicating efficient degradation, burial and offshore transport of terrestrial OM within the lagoon. While currents and wind-driven resuspension are expected to further enhance OM redistribution and export, a substantial amount of OM is sequestered and mineralized in lagoon sediments reflecting both effective burial and degradation of erosion-derived OM. Yet, a major portion of OM is also quickly removed offshore. Shoreline erosion rates increased from 0.6 m yr^-1in the 1950s to 0.9 m yr^-1in the 1970s to 3.3 m yr^-1 in 2011 to 2018, paralleled by increasing mass accumulation rates from 0.32 to 0.57 g cm^-2yr^-1. Due to intensified erosion and warming-induced permafrost degradation, lagoons and embayments will be supplied with increasing amounts of terrestrial OM being subject to either mineralization, sequestration or offshore transport, also fueling primary production in these Arctic coastal “reactors” at the same time. Our results highlight that Arctic lagoons, often overlooked components of the land–ocean transition zone, act as dynamic reactors and partial sinks for terrestrial OM. Intensifying coastal erosion as a result of Arctic climate warming is likely to increase their importance in Arctic carbon cycling.