Sorry, I didn't realise you meant putting in the water. (myopic thoughts) I thought you meant as a building material.
I know cedar isn't good for small animals as bedding, I couldn't imagine it would be any better submerged in water. Too many toxic oils in the wood. I'd say its probably not worth the risk, unless its a really, really small piece compared to the volume of water you have.
I suppose the sealing idea could still be valid, I have seen people do it. Using clear epoxies, or polyurethane..ect. But like you said, it still might leach things into the water, and the piece would have to weighted down as it would never get water logged.
Or, you could weather the piece before hand. A season submerged would probably make it aquarium safe, but I'm not positive on this either.