The current latitudinal gradient in biomass suggests a climate-driven limitation of biomass in high latitudes. Understanding of the underlying processes, and quantification of their relative importance, is required to assess the potential carbon uptake of the biosphere in response to anticipated warming and related changes in tree growth and forest extent in these regions. We analyze the hydrological effects of thawing and freezing of soil on vegetation carbon density (VCD) in permafrost-dominated regions of Siberia using a process-based biogeochemistry-biogeography model, the Lund-Potsdam-Jena Dynamic Global Vegetation Model (LPJ-DGVM). The analysis is based on spatially explicit simulations of coupled daily thaw depth, site hydrology, vegetation distribution, and carbon fluxes influencing VCD subject to climate, soil texture, and atmospheric CO2 concentration. LPJ represents the observed high spring peak of runoff of large Arctic rivers, and simulates a realistic fire return interval of 100 to 200 years in Siberia. The simulated VCD changeover from taiga to tundra is comparable to inventory-based information. Without the consideration of freeze-thaw processes VCD would be overestimated by a factor of 2 in southern taiga to a factor of 5 in northern forest tundra, mainly because available soil water would be overestimated with major effects on fire occurrence and net primary productivity. This suggests that forest growth in high latitudes is not only limited by temperature, radiation, and nutrient availability but also by the availability of liquid soil water.