Understanding the structural properties of lignite during hydrothermal treatment would aid in predicting the subsequent behavior of coal during the pyrolysis, liquefaction, and gasification processes. Here, hydrothermal treatment of Inner Mongolia lignite (IM) was carried out in a lab autoclave. The distribution of carbon in the lignite was monitored via solid 13C nuclear magnetic resonance spectroscopy, and the functional groups of oxygen in lignite were determined by Fourier transform infrared spectroscopy. The curve-fitting method was used to calculate the content of the functional groups quantitatively. The results show that hydrothermal treatment is an effective method for upgrading the lignite. The side chains of the aromatic ring in lignite are altered, while the main macromolecular structure remains nearly the same. The hydrothermal treatment of IM could be divided into three temperature-dependent stages. The first stage (< 493 K) is the decomposition reaction of oxygen functional groups, where the O/C ratio decreases from 0.203 in raw IM to 0.185 for the IM treated at 493 K. In the second stage (493–533 K), hydrolysis of functional groups and hydrogen transfer between water and lignite occur. Here, the ratio of methylene to methyl increases from 0.871 in IM-493 to 1.241 for IM-533, and the content of quinone generates from the condensation of free phenol increased. The third stage (> 533 K) involves breakage of the covalent bond, and the content of CH4 and CO in the emission gas clearly increase.