Alpine wetlands on the Qinghai–Tibet Plateau are increasingly degraded, threatening soil nitrogen (N) cycling and ecosystem functioning. However, how degradation restructures enzyme-mediated soil N cycling and its functional balance remains poorly understood. To address this gap, we conducted a three-year field investigation across four degradation stages (non-degraded, lightly degraded, moderately degraded, and heavily degraded wetlands) in the Gahai Wetland. We quantified four key soil N-cycling enzymes, namely urease, protease, nitrate reductase, and nitrite reductase, and developed a nitrogen cycling functional balance (NCFB) index to assess shifts in the coordination between hydrolytic and reductive functions. Degradation-induced drying and nutrient depletion reduced soil water content, soil organic carbon, total nitrogen, ammonium availability, and microbial biomass N, while increasing soil temperature and nitrate accumulation. Degradation increased urease and nitrate reductase activities but decreased protease and nitrite reductase activities, indicating enzyme-specific restructuring of soil N cycling. Most enzyme activities peaked in mid-growing season, whereas nitrate reductase peaked later. Soil N cycling shifted from a relatively coordinated state in non-degraded wetlands toward greater functional imbalance in degraded wetlands. This reorganization was strongly modulated by hydroclimatic variability, with drier conditions amplifying degradation, induced divergence in enzyme activities. Redundancy analysis and piecewise structural equation modeling showed that soil water content, organic carbon, inorganic N availability, and microbial biomass N were the primary regulators of enzyme variation and N-cycling functional imbalance. Overall, this study provides new insight into mechanisms of soil N-cycling destabilization in degraded alpine wetlands and informs wetland restoration under a drier future climate.