Soil biocrusts, formed from communities of microbes and their extracellular products are a common feature of dryland soil surfaces. Biocrust organisms are only intermittently metabolically active, but due to their ubiquity they make a significant contribution to the carbon cycle. Quantification of the controls and insights into the interlinked process of photosynthesis and respiration are essential to enhancing our understanding of the carbon cycle in the world's drylands. Yet, there have been relatively few field studies investigating controls on both biocrust photosynthesis and respiration. We undertook field-based experiments at two dune sites during the dry season in Diamantina National Park in Queensland, Australia to determine how biocrust hydration and illumination affect soil CO2 flux and photosynthesis. Static chambers and an infra-red gas analyser were used to quantify soil CO2 flux, and a fluorometer and a CFImager were used to determine a range of photosynthetic parameters in the field and laboratory respectively. When dry, biocrust photosynthetic activity was not detected and soil CO2 flux was very low irrespective of biocrust cover. Hydration led to a large and immediate increase in CO2 flux, which was more pronounced in the presence of biocrusts and on the dune with thinner biocrusts. Hydration also initiated the onset of photosynthesis in some biocrusts, which was greatest under low light conditions and sustained with further hydration. There were only infrequent periods of net CO2 uptake to the soil, occurring when CO2 uptake due to photosynthetic activity was less than background soil CO2 flux. Chlorophyll fluorescence imaging indicated biocrust spatial heterogeneity was evident at the cm scale where microtopography creates a myriad of environments for different crust organisms. Our findings demonstrate that biocrusts are highly spatially heterogenetic at both landscape and small scale, which suggests the maintenance of biocrust spatial diversity is likely to be key to imparting resilience to changing climate and disturbance. As well as reaffirming the importance of biocrusts for the carbon cycle in dryland dune soils the study demonstrates that biocrust respiration and photosynthesis respond differently to hydration and shading. This adds an unpredictability to the distribution of soil carbon stocks and the gaseous exchanges of CO2 between the surface and atmosphere. Future changes to precipitation and increased temperatures are likely to reduce soil moisture across much of the Australian interior and consequently biocrusts may experience a decline in biomass, structure, and function which could have significant repercussions beyond carbon stocks.