COVID-19 ranges from asymptomatic in 35% of cases to severe in 20% of patients. Differences in the type and degree of inflammation appear to determine the severity of the disease. Recent reports show an increase in circulating monocytic-myeloid-derived suppressor cells (M-MDSC) in severe COVID 19, that deplete arginine but are not associated with respiratory complications. Our data shows that differences in the type, function and transcriptome of Granulocytic-MDSC (G-MDSC) may in part explain the severity COVID-19, in particular the association with pulmonary complications. Large infiltrates by Arginase 1 + G-MDSC (Arg + G-MDSC), expressing NOX-1 and NOX-2 (important for production of reactive oxygen species) were found in the lungs of patients who died from COVID-19 complications. Increased circulating Arg + G-MDSC depleted arginine, which impaired T cell receptor and endothelial cell function. Transcriptomic signatures of G-MDSC from patients with different stages of COVID-19, revealed that asymptomatic patients had increased expression of pathways and genes associated with type I interferon (IFN), while patients with severe COVID-19 had increased expression of genes associated with arginase production, and granulocyte degranulation and function. These results suggest that asymptomatic patients develop a protective type I IFN response, while patients with severe COVID-19 have an increased inflammatory response that depletes arginine, impairs T cell and endothelial cell function, and causes extensive pulmonary damage. Therefore, inhibition of arginase-1 and/or replenishment of arginine may be important in preventing/treating severe COVID-19.