Background: Between 30 and 60% of adults with unipolar or bipolar disorders exhibit impairments across multiple domains. However, little is known about impaired functioning in youth with mood disorders. Aims: To examine the prevalence of objective, subjective and observer-rated disability in a large, representative sample of young people with a primary mood disorder. Method: Individuals aged 16-25 years presenting to youth mental health services for the first time with a primary mood disorder participated in a systematic diagnostic and clinical assessment. Impairment was assessed using objective (unemployment or disability payments), observer- (Social and Occupational Functioning Assessment Scale; SOFAS) and self-rated measures (role functioning according to the Brief Disability Questionnaire). Results: Of 1241 participants (83% unipolar; 56% female), at least 30% were functionally impaired on the objective, self-rated and/or observer-rated measures, with 16% impaired according to all three criteria. Even when current distress levels were taken into account, daily use of cannabis and/or nicotine were significantly associated with impairment, with odds ratios (OR) ranging from about 1.5 to 3.0. Comorbid anxiety disorders were related to lower SOFAS scores (OR = 2-5). Conclusions: Levels of disability were significant, even in those presenting for mental healthcare for the first time. Functional impairment did not differ between unipolar and bipolar cases, but some evidence suggested that females with bipolar disorder were particularly disabled. The prevalence of comorbid disorders (50%) and polysubstance use (28%) and their association with disability indicate that more meaningful indicators of mood episode outcomes should focus on functional rather than symptom-specific measures. The association between functioning and nicotine use requires further exploration.