Biological soil crusts (BSCs) are important in many arid and semiarid ecosystems for their abilities to fix atmospheric nitrogen (N) and stabilize surface soil. Grazing disturbance has a profound influence on abundance, species composition, and ecological functioning of BSCs. To elucidate the effects of grazing on BSCs in Inner Mongolia grasslands, an investigation was conducted in a typical steppe that had previously been subjected to long-term grazing with six grazing densities (control: 0 sheep · ha⁻¹, very light: 4 sheep ·ha⁻¹, light: 8 sheep · ha⁻¹, medium: 12 sheep · ha⁻¹, heavy: 16 sheep · ha⁻¹, and very heavy: 20 sheep · ha⁻¹). Cover, species composition, potential N-fixing activity, and potential N input of BSC indicate that long-term grazing significantly reduced the importance of BSC in N input and soil stabilization. Such reductions were highly related to grazing density. Very light grazing had no significant effect on the role of BSC in soil stabilization, but resulted in a 13.3% reduction in BSC N input potential. Heavy and very heavy grazing led to a decrease of potential N input by one order of magnitude, and a decline of BSC function via a shift from high coverage of an attached group–dominated BSC community to a low coverage of a vagrant group–dominated community. Constraining grazing level to a very light density—and to a lesser extent, a light grazing density—is likely a preferred practice for conserving BSC and the ecological services it provides in N fixation and soil stabilization.