Environmental sex determination (ESD) occurs in divergent, phylogenetically unrelated taxa, and in some species, co-occurs with genetic sex determination (GSD) mechanisms. Although epigenetic regulation in response to environmental effects has long been proposed to be associated with ESD, a systemic analysis on epigenetic regulation of ESD is still lacking. Using half-smooth tongue sole (Cynoglossus semilaevis) as a model—a marine fish that has both ZW chromosomal GSD and temperature-dependent ESD—we investigated the role of DNA methylation in transition from GSD to ESD. Comparative analysis of the gonadal DNA methylomes of pseudomale, female, and normal male fish revealed that genes in the sex determination pathways are the major targets of substantial methylation modification during sexual reversal. Methylation modification in pseudomales is globally inherited in their ZW offspring, which can naturally develop into pseudomales without temperature incubation. Transcriptome analysis revealed that dosage compensation occurs in a restricted, methylated cytosine enriched Z chromosomal region in pseudomale testes, achieving equal expression level in normal male testes. In contrast, female-specific W chromosomal genes are suppressed in pseudomales by methylation regulation. We conclude that epigenetic regulation plays multiple crucial roles in sexual reversal of tongue sole fish. We also offer the first clues on the mechanisms behind gene dosage balancing in an organism that undergoes sexual reversal. Finally, we suggest a causal link between the bias sex chromosome assortment in the offspring of a pseudomale family and the transgenerational epigenetic inheritance of sexual reversal in tongue sole fish.