As global ocean deoxygenation proceeds and the frequency of extreme low-oxygen (hypoxic) events increases, seafloor ecosystems will inevitably be affected. Our study examines how benthic community responses scale with the severity and spatial extent of hypoxia. Saanich Inlet is a natural model system for testing the effects of hypoxic conditions that determine the benthic megafaunal community structure during annual deoxygenation and reoxygenation. In 2016, an anomalously severe and widespread hypoxic event occurred in the fjord after a decade of oxygen decline at a rate of 0.07 mL L−1 y−1 as measured by a cabled seafloor observatory. We use a living ecological time-series generated from remotely operated vehicle surveys to assess how the benthic megafaunal community disassembled in response to this extreme hypoxic event. Three benthic surveys at similar times in 2013 and 2016 reveal large increases in the area of seafloor bathed in anoxic and hypoxic waters in the latter year. Both bottom oxygen and species depth distributions shoaled from 2013 to 2016, accompanied by a 56% overall decline in megafauna. The abundant habitat-forming pennatulacean octocoral, Halipteris willemoesi, decreased in abundance by 92.3% from fall 2013 to fall 2016, and pandalid shrimp disappeared from the community. Hypoxia-tolerant species experienced milder losses, and two new species occurred in 2016 – one a predator on the coral. Co-occurrence analyses revealed loss of significant community segregation from 2013 to 2016, and a re-mix of pairwise species co-occurrences in the latter year. The loss of oxygenated habitat compressed species into narrower depth ranges and led to disassembly probably through niche space constriction, while decimation of some populations eliminated key community associations. Community fragmentation and disruption of interactions is a possible outcome for many marine benthic ecosystems as marine hypoxia intensifies.