The vandalism was reported on the eve of the festival in what has been labelled a "deeply concerning incident".
Winter Pride co-director Sam Coulthard said there was CCTV footage taken at 3am last Friday showing four people wearing hoods climbing up the flagpoles.
The street flags, worth $12,000, were installed around the Queenstown Bay and Village Green area as part of the Winter Pride event, which began yesterday.
"This act of vandalism is not just an attack on property — it sends a troubling message to our community and raises concerns about small-town homophobia," Mr Coulthard said.
The identities of the vandals were not yet known, but it was important for the community to know "we are here and we support you".
A Givealittle page has been launched to fund replacements for the flags, which cost $400 each to produce.
"We’ve noticed a lot of hate coming from a lot of people, which shows this festival is still very important.
"When you are unknown or coming from out of town, these flags are very important to make you feel like you are where you belong, that you’re accepted here, that it’s a welcoming place and the community is here to support you."
Sergeant Steve Watt said police were investigating.
"We can’t know the motive for removing these flags until we have identified those responsible.
Police knew how frustrating it was for the organisers of this "vibrant festival". which injected a "real boost" to the town.
"We’re keen to hear from anyone who might have information about this theft."
Queenstown Lakes District Mayor Glyn Lewers said whether it was a "drunken prank" or something more deliberate and targeted, it had caused a lot of hurt and anger.
"I’m enormously proud to be mayor of this district, and I’m equally proud that we’re hosting Winter Pride again this year.
"Whilst I respect anyone’s right not to engage in this celebration if they choose, I am firmly opposed to anyone who thinks they have the right to take choice away from others."
