Palaeontological and zooarchaeological deposits have been recovered from underwater caves across the globe, but studies on site formation processes in these environments are scattered and have never been systematically examined. Flooded caves in the phreatic zone of karst systems include sinkholes and fensters (windows) that form a connection between the sub-aerial and sub-terranean landscapes, and conduits and chambers that establish underground networks of tunnels. Burial environments in these spaces are variable, and sedimentary, cave morphologic, and hydrologic variability within a single site can have profound impacts on taphonomic processes. The key determinant on long term preservation in these spaces is, however, the presence of water which dictates the nature of any habitation and by which species, and the process of decay. Water tables can fluctuate with long- and short-term sea level changes, with concomitant shifts in burial environments between flooded ‘wet’ or exposed ‘dry’ settings in near-shore cave systems. Distinguishing wet and dry burial conditions is necessary to reconstruct site formation processes in caves exhibiting evidence of changing or cyclical phreatic and vadose conditions. Signatures of aquatic deposition have been identified in underwater sites under marine, lacustrine and fluvial settings, but similar investigations are lacking for submerged cave landscapes. Water influences the decay process, alters bone surfaces, and modifies internal physical and chemical properties of bones. By exploring the environmental properties of flooded caves alongside known aquatic modifications, this review aims to build a framework for taphonomy of underwater cave palaeontological and archaeological sites. We detail biostratinomic and diagenesis processes that can be explored by actualistic, experimental, and observational studies. Future consideration could be given to the effects of human actions on the spatial distribution and modifications of bones in these spaces and the combined effects of environmental and anthropic agents.