Management practices such as cover cropping can reshape soil microbial niches by modifying the distribution of carbon (C) and nitrogen (N) substrates, oxygen availability, and redox conditions that regulate microbial metabolism. Yet how these shifts in microbial functional groups alter the trade-off between soil C storage and nitrous oxide (N₂O) production remains poorly resolved. Cover cropping provides a particularly relevant model to address this question because it is widely promoted as a climate-smart strategy, yet its net climate impact depends on how cover crop traits modify residue inputs, N availability, and microsite redox heterogeneity that govern microbial C and N transformations. In this perspective, we synthesize recent advances in understanding how cover crop functional traits regulate microbial N cycling, soil C–N interactions, and N₂O emissions. Legume and grass cover crops differ in N acquisition strategy, biomass accumulation, and residue chemistry, generating contrasting effects on soil C inputs, N availability, residue decomposition, oxygen diffusion and microsite redox conditions. These differences can shift the substrate and redox conditions that govern nitrification, denitrification, and coupled N₂O-producing pathways during cover crop growth and residue decomposition. As a case study of how cover crop traits may filter microbial functional groups, we examined field studies evaluating the response of ammonia-oxidizing microorganisms. Legume cover crops tended to increase the abundance of ammonia-oxidizing bacteria and potentially increased their contributions to nitrification-derived N₂O emissions, whereas responses of ammonia-oxidizing archaea were more variable. We argue that predicting the net climate impact of cover crops requires microbial–biogeochemical approaches that integrate microbial community analyses with gross N transformation rates, N₂O source partitioning, and measurements of soil microsite conditions, thereby clarifying the biological processes that regulate the trade-offs between soil C storage and N₂O emissions.