Graphene nanoscrolls are Archimedean-type spirals formed by rolling single-layer graphene sheets. Their unique structure makes them conceptually interesting and understanding their formation gives important information on the manipulation and characteristics of various carbon nanostructures. Here we report a 100% efficient process to transform nitrogen-doped reduced graphene oxide sheets into homogeneous nanoscrolls by decoration with magnetic γ-Fe2O3 nanoparticles. Through a large number of control experiments, magnetic characterization of the decorated nanoparticles, and ab initio calculations, we conclude that the rolling is initiated by the strong adsorption of maghemite nanoparticles at nitrogen defects in the graphene lattice and their mutual magnetic interaction. The nanoscroll formation is fully reversible and upon removal of the maghemite nanoparticles, the nanoscrolls return to open sheets. Besides supplying information on the rolling mechanism of graphene nanoscrolls, our results also provide important information on the stabilization of iron oxide nanoparticles.