Lakes are a nitrous oxide (N2O) source to the atmosphere, but the biogeochemical controls and microbial pathways of N2O production are not well understood. To trace microbial N2O production (denitrification, nitrifier denitrification, and nitrification) and consumption (denitrification) in two basins of Lake Lugano, we measured the concentrations and N and O isotope compositions of N2O, as well as the intramolecular 15N distribution, i.e., site preference (SP). Our results revealed differential N2O dynamics in the two lake basins, with N2O concentrations between 12 nmol L−1 and > 900 nmol L−1 in the holomictic South Basin, and significantly lower concentrations in the meromictic North Basin (<13 nmol L−1). In the South Basin, the isotope signatures reflected a complex combination of N2O production by nitrifying bacteria through hydroxylamine (NH2OH) oxidation, N2O production through incomplete denitrification, and N2O reduction to N2, all occurring in close vicinity within the redox transition zone (RTZ). In the North Basin, in contrast, the N2O isotopomer signatures suggested that nitrifier denitrification was the main N2O source. The pronounced decrease in N2O concentrations to undetectable levels within the RTZ, in tandem with an increase in δ15N‐N2O, δ18O‐N2O, and SP indicated quantitative N2O consumption by microbial denitrification. In the northern basin this was primarily sulfide‐dependent. The apparent N and O isotope enrichment factors associated with net N2O consumption were 15ε ≈ 3.2‰ and 18ε ≈ 8.6‰, respectively. The according 18O to 15N enrichment ratio (18ε: 15ε ≈ 2.5) is consistent with previous reports for microbial N2O reduction, underscoring its robust nature across environments.