Coral reefs experience numerous natural and anthropogenic environmental gradients that alter biophysical conditions and affect biodiversity. While many studies have focused on drivers of reef biodiversity using traditional diversity metrics (e.g., species richness, diversity, evenness), less is known about how environmental variability may influence functional diversity. In this study, we tested the impact of submarine groundwater discharge (SGD) on taxonomic and functional diversity metrics in Mo‘orea, French Polynesia. SGD is the expulsion of terrestrial fresh or recirculated seawater into marine environments and is associated with reduced temperatures, pH, and salinity and elevated nutrient levels. Using a regression approach along the SGD gradient, we found that taxon and functional-entity richness displayed unimodal relationships to SGD parameters, primarily nitrate + nitrite and phosphate variability, with peak richness at moderate SGD for stony coral and the full benthic community. Macroalgae showed this unimodal pattern for functional-entity but not taxonomic richness. Functional community composition (presence and abundance of functional entities) increased along the gradient, while taxonomic composition showed a nonlinear relationship to SGD-related parameters. SGD is a common feature of many coastal ecosystems globally and therefore may be more important to structuring benthic functional diversity than previously thought. Further, studying community shifts through a functional-trait lens may provide important insights into the roles of community functions on ecosystem processes and stability, leading to improved management strategies.