Recent neuroscientific theories have proposed that emotions experienced in dreams contribute to the resolution of emotional distress and preparation for future affective reactions. We addressed one emerging prediction, namely that experiencing fear in dreams is associated with more adapted responses to threatening signals during wakefulness. Using a stepwise approach across two studies, we identified brain regions activated when experiencing fear in dreams and showed that frightening dreams modulated the response of these same regions to threatening stimuli during wakefulness. Specifically, in Study 1, we performed serial awakenings in 18 participants recorded throughout the night with high‐density electroencephalography (EEG) and asked them whether they experienced any fear in their dreams. Insula and midcingulate cortex activity increased for dreams containing fear. In Study 2, we tested 89 participants and found that those reporting higher incidence of fear in their dreams showed reduced emotional arousal and fMRI response to fear‐eliciting stimuli in the insula, amygdala and midcingulate cortex, while awake. Consistent with better emotion regulation processes, the same participants displayed increased medial prefrontal cortex activity. These findings support that emotions in dreams and wakefulness engage similar neural substrates, and substantiate a link between emotional processes occurring during sleep and emotional brain functions during wakefulness.