The gill is one of the most important organs for growth and survival of fishes. Early life stages in coral reef fishes often exhibit extreme physiological and demographic characteristics that are linked to well-established respiratory and ionoregulatory processes. However, gill development and function in coral reef fishes is not well understood. Therefore, we investigated gill morphology, oxygen uptake and ionoregulatory systems throughout embryogenesis in two coral reef damselfishes, Acanthochromis polyacanthus and Amphiprion melanopus (Pomacentridae). In both species, we found key gill structures to develop rapidly early in the embryonic phase. Ionoregulatory cells appear on gill filaments 3–4 days post-fertilization and increase in density, whilst disappearing or shrinking in cutaneous locations. Primary respiratory tissue (lamellae) appears 5–7 days post-fertilization, coinciding with a peak in oxygen uptake rates of the developing embryos. Oxygen uptake was unaffected by phenylhydrazine across all ages (pre-hatching), indicating that haemoglobin is not yet required for oxygen uptake. This suggests that gills have limited contribution to respiratory functions during embryonic development, at least until hatching. Rapid gill development in damselfishes, when compared with that in most previously investigated fishes, may reflect preparations for a high-performance, challenging lifestyle on tropical reefs, but may also make reef fishes more vulnerable to anthropogenic stressors.