A dropping nitrification reactor was proposed as a low-cost and energy-saving option for the removal of NH₄⁺-N from contaminated groundwater. The objectives of this study were to investigate NH₄⁺-N removal performance and the nitrogen removal pathway and to characterize the microbial communities in the reactor. Polyolefin sponge cubes (10 mm × 10 mm × 10 mm) were connected diagonally in a nylon thread to produce 1 m long dropping nitrification units. Synthetic groundwater containing 50 mg L⁻¹ NH₄⁺-N was added from the top of the hanging units at a flow rate of 4.32 L day⁻¹ for 56 days. Nitrogen-oxidizing microorganisms in the reactor removed 50.8–68.7% of the NH₄⁺-N in the groundwater, which was aerated with atmospheric oxygen as it flowed downwards through the sponge units. Nitrogen transformation and the functional bacteria contributing to it were stratified in the sponge units. Nitrosomonadales-like AOB predominated and transformed NH₄⁺-N to NO₂⁻-N in the upper part of the reactor. Nitrospirales-like NOB predominated and transformed NO₂⁻-N to NO₃⁻-N in the lower part of the reactor. The dropping nitrification reactor could be a promising technology for oxidizing NH₄⁺-N in groundwater and other similar contaminated wastewaters.