The biodiversity of microbial communities has important implications for the stability and functioning of ecosystem processes. Yet, very little is known about the environmental factors that define the microbial niche and how this influences the composition and activity of microbial communities. In this study, we derived niche parameters from physiological response curves that quantified microbial respiration for a diverse collection of soil bacteria and fungi along a soil moisture gradient. On average, soil microorganisms had relatively dry optima (0.3 MPa) and were capable of respiring under low water potentials (−2.0 MPa). Within their limits of activity, microorganisms exhibited a wide range of responses, suggesting that some taxa may be able to coexist by partitioning the moisture niche axis. For example, we identified dry-adapted generalists that tolerated a broad range of water potentials, along with wet-adapted specialists with metabolism restricted to less-negative water potentials. These contrasting ecological strategies had a phylogenetic signal at a coarse taxonomic level (phylum), suggesting that the moisture niche of soil microorganisms is highly conserved. In addition, variation in microbial responses along the moisture gradient was linked to the distribution of several functional traits. In particular, strains that were capable of producing biofilms had drier moisture optima and wider niche breadths. However, biofilm production appeared to come at a cost that was reflected in a prolonged lag time prior to exponential growth, suggesting that there is a trade-off associated with traits that allow microorganisms to contend with moisture stress. Together, we have identified functional groups of microorganisms that will help predict the structure and functioning of microbial communities under contrasting soil moisture regimes.