Soil organic carbon (SOC) is an important component of the global carbon cycle yet is rarely quantified adequately in terms of its spatial variability resulting from losses of SOC due to erosion by water. Furthermore, in drylands, little is known about the effect of widespread vegetation change on changes in SOC stores and the potential for water erosion to redistribute SOC around the landscape especially during high-magnitude run-off events (flash floods). This study assesses the change in SOC stores across a shrub-encroachment gradient in the Chihuahuan Desert of the south-west USA. A robust estimate of SOC storage in surface soils is presented, indicating that more SOC is stored beneath vegetation than in bare soil areas. In addition, the change in SOC storage over a shrub-encroachment gradient is shown to be nonlinear and highly variable within each vegetation type. Over the gradient of vegetation change, the heterogeneity of SOC increases, and newer carbon from C3 plants becomes dominant. This increase in the heterogeneity of SOC is related to an increase in water erosion and SOC loss from inter-shrub areas, which is self-reinforcing. Shrub-dominated drylands lose more than three times as much SOC as their grass counterparts. The implications of this study are twofold: (1) quantifying the effects of vegetation change on carbon loss via water erosion and the highly variable effects of land degradation on soil carbon stocks is critical. (2) If landscape-scale understanding of carbon loss by water erosion in drylands is required, studies must characterize the heterogeneity of ecosystem structure and its effects on ecosystem function across ecotones subject to vegetation change. Copyright © 2013 John Wiley & Sons, Ltd.