Elucidating the characteristics and underlying mechanisms of soil organic carbon (SOC) and nitrogen mineralization in the context of sludge addition is vital for enhancing soil quality and augmenting the carbon sink capacity of soil. This study examined the chemical properties, enzyme dynamics, and organic carbon and nitrogen mineralization processes of soil from degraded grasslands on the Loess Plateau at various incubation temperatures (5, 15, 25, and 35 °C) and sludge addition rates (0%, 5.0%, 10.0%, and 20.0%) through a laboratory incubation experiment. The results showed that incubation temperature, sludge addition, and their interactive effects significantly altered the soil enzyme C:N, C:P, and N:P stoichiometries. The cumulative mineralization rates of SOC and nitrogen increased significantly with increasing incubation temperature and sludge addition rate. Principal component analysis revealed a significant linear correlation between cumulative SOC and nitrogen mineralization. Random forest analysis indicated that β-1,4-Glucosidase (BG), β-1,4-N-acetyglucosaminidase (NAG), cellobiohydrolase (CBH), ammonium nitrogen (NO3−), enzyme C:P ratio, alkaline phosphatase (ALP), and incubation temperature were crucial determinants of cumulative SOC mineralization. Structural equation modeling demonstrated that sludge addition, NO3−, NAG, ALP, and enzyme C:P positively impacted SOC mineralization, whereas dissolved organic carbon and BG had negative impacts. Conversely, incubation temperature negatively affected soil nitrogen mineralization, whereas NO3−, available phosphorus, and ALP contributed positively. Sludge addition and temperature indirectly modulated soil net nitrogen mineralization by altering soil chemical properties and enzyme activities. These findings underscore the role of SOC and nitrogen mineralization as indicators for evaluating soil nutrient retention capabilities.