Carbon in thawing permafrost soils may have global impacts on climate change; however, the factors that control its processing and fate are poorly understood. The dominant fate of dissolved organic carbon (DOC) released from soils to inland waters is either complete oxidation to CO2 or partial oxidation and river export to oceans. Although both processes are most often attributed to bacterial respiration, we found that photochemical oxidation exceeds rates of respiration and accounts for 70 to 95% of total DOC processed in the water column of arctic lakes and rivers. At the basin scale, photochemical processing of DOC is about one-third of the total CO2 released from surface waters and is thus an important component of the arctic carbon budget.