Harmful algal blooms in eutrophic lakes pose significant challenges to the aquatic environment. Aerobic composting is an effectively method for processing and reusing dewatered algal sludge. The fungal communities are the main driver of composting. However, their relationship with carbon loss and the humification process during algal sludge composting remains unclear. In this study, the succession of fungal communities in algal sludge composting was investigated via internal transcribed spacer (ITS) rRNA amplicon sequencing analysis. Overall, no significant differences were observed with the α-diversity of fungal communities at different stages. The composition of the fungal communities changed significantly before and after compost maturation and became more stable after the compost maturation. Redundancy analysis showed that the fungal communities were significantly correlated with physicochemical properties, including humic acid (HA)/fulvic acid (FA), temperature, pH, humic acid, microcystins, and CO2. The co-occurrence network showed that different fungal community modules had different relationships with physicochemical properties. Structural equation modeling further revealed that different metabolic or transformation processes may be mainly driven by different fungi modules. The microcystin degradation, carbon loss, and humification during composting were mainly mediated by fungal communities which were mainly influenced by temperature. Humification was influenced not only by fungal communities but also by the microcystin levels. These results show that changes in the fungal community composition and interaction and their relationship with physicochemical properties could represent a useful guide for optimizing the composting process.