Nitriding of nanocrystalline iron and reduction of nanocrystalline iron nitride with gaseous mixtures of hydrogen with ammonia were studied at 375 °C and atmospheric pressure using the chemical potential programmed reaction (CPPR) method coupled with in situ XRD. In this paper, a series of phase transitions occurring during the processes is shown, and a detailed analysis of the phase composition and the structure of the material is given. The influence of a variable nitriding potential on the lattice parameters of α-Fe, γ′-Fe4N, and ε-Fe3-2N phases is shown. The α phase interplanar space changes irrelevantly in the one phase area but decreases linearly with average increases in crystallite size when α→γ′ transformation occurs. The nanocrystallite size distributions (nCSDs) were determined, with nCSD of the α phase for nitriding and nCSD of the ε phase for reduction. The reduction of the ε phase can occur directly to α or indirectly with an intermediate step of γ′ formation as a result of ε→γ′→α transformations. The determining factor in the reducing process method is the volume of ε phase nanocrystallites. Those with V < 90,000 nm3 undergo direct transformation ε→αFe(N), and V > 90,000 nm3 transforms to αFe(N) indirectly. It was determined at what value of nitriding potential which fraction of the ε phase nanocrystallites starts to reduce