Wood is a major carbon input into aquatic ecosystems and is thought to decay slowly, yet surprisingly little terrestrial carbon accumulates in marine sediments. A better mechanistic understanding of how habitat conditions and decomposer communities influence wood decay processes along the river–estuary–ocean continuum can address this seeming paradox. We measured mass loss, wood element, and polymer concentrations, quantified invertebrate‐induced decay, and sequenced fungal communities associated with replicate sections of Guazuma branch wood submerged in freshwater, estuarine, and near‐shore marine habitats and placed on the soil surface in nearby terrestrial habitats in three watersheds in the tropical eastern Pacific. Over 15 months, we found that wood decayed at similar rates in estuarine, marine, and terrestrial sites, reflecting the combined activity of invertebrate and microbial decomposers. In contrast, in the absence of shipworms (Teredinidae), which accounted for ~40% of wood mass loss in the estuarine habitats, decay proceeded more slowly in freshwater. Over the experiment, wood element chemistry diverged among freshwater, estuarine, and marine habitats, due to differences in both nutrient losses (e.g., potassium and phosphorus) and gains (e.g., calcium and aluminum) through decay. Similarly, we observed changes in wood polymer content, with the highest losses of cellulose, hemicellulose, and lignin moieties in the marine habitat. Aquatic fungal communities were strongly dominated by ascomycetes (88–99% of taxa), compared to terrestrial communities (55% ascomycetes). Large differences in fungal diversity were also observed across habitats with threefold higher richness in terrestrial than freshwater habitats and twofold higher diversity in freshwater than estuarine/marine habitats. Divergent decay trajectories across habitats were associated with widespread order‐level differences in fungal composition, with distinct communities found in freshwater, estuarine and marine habitats. However, few individual taxa that were significantly associated with mass loss were broadly distributed, suggesting a high level of functional redundancy. The rapid processing of wood entering tropical rivers by microbes and invertebrates, comparable to that on land, indicates that estuaries and coastal oceans are hotspots not just for the processing of particulate and dissolved organic carbon, but also for woody debris and for the breakdown of lignin, the most recalcitrant polymer in plant tissue.