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This study investigated the effect of lipid extraction of microalgae feedstocks subjected to hydrothermal carbonization (HTC) with regard to the carbonization degree, chemical composition and phytotoxicity of hydrochars produced under different reaction temperatures and residence times. Special attention was given to the formation and composition of secondary char, as this part of the hydrochar may be of particular importance for environmental and technical applications. A microalgae polyculture grown in municipal wastewater was extracted to retrieve lipids, and both unextracted (MA) and extracted microalgae (EMA) were used to produce hydrochars at 180–240 °C for 1–4 h. The composition of the hydrochars was thoroughly characterized by elemental analysis, thermogravimetric analysis and pyrolysis–gas chromatography/mass spectrometry analysis. MA exhibited a greater carbonization degree than EMA and contained higher amounts of secondary char under the same processing conditions. During the carbonization of EMA, more decomposition products remained in the liquid phase and less polymerization occurred than for MA, which explained the lower solid yield of EMA-derived hydrochars in comparison to MA hydrochars. Consequently, although they contained potentially toxic substances (i.e., carboxylic acids, aldehydes and ketones), the EMA-derived hydrochars exhibited a lower phytotoxic potential. This indicates that low-temperature hydrochars containing less than 10% of extractives might be suitable as soil amendments, whereas extractive-rich hydrochars would be more appropriate for other long-term applications, such as adsorbents for contaminant removal, energy storage and composite materials. Detailed characterization of microalgae-derived hydrochars is required to enable the most suitable application areas to be identified for these materials, and thereby make full use of their function as carbon sinks.