The carbon isotopic signature (δ13C) of coral skeletons is influenced by isotopic fractionation (εorg) during photosynthetic dissolved inorganic carbon (DIC) fixation, but only a few direct εorg measurements are available in coral communities. In particular, observations of εorg at the ecosystem scale are lacking. Here we present high frequency (hourly) measurements of DIC and its δ13C in the water column and benthic chambers in a highly productive coral reef lagoon (Heron Island, Great Barrier Reef, Australia) and apply simple molar balance calculations to infer community εorg. Variation in εorg was between 3.7‰ and 25.2‰ in the open lagoon, with lower values during the mid-afternoon and higher values in early morning and evening. The εorg range was broader (0.3–30.1‰) in enclosed benthic chambers with a similar diel pattern. There was a strong correlation between carbon uptake rates and εorg in closed incubations, suggesting that C demand largely controlled εorg. Benthic chamber incubations revealed increased εorg as water circulation increased, implying that C supply to photosynthesizing algae on the sediment also influenced εorg. Hysteresis in carbon uptake through the day complicated the expected straightforward influence of irradiance on C demand, and consequently on εorg. These results highlight the need for more in depth understanding on carbon uptake rates to fully understand δ13C variation in coral paleo-records.