Kraus was born into a wealthy Jewish family of Jacob Kraus, a papermaker, and his wife Ernestine, née Kantor, in Gitschin, Bohemia (now Jičín in the Czech Republic). The family moved to Vienna in 1877. His mother died in 1891.

Kraus enrolled as a law student at the University of Vienna in 1892. Beginning in April of the same year he began contributing to the paper Wiener Literaturzeitung, starting with a critique of Gerhart Hauptmann's Die Weber. Around that time, he unsuccessfully tried to perform as an actor in a small theater. In 1894 he changed his field of studies to philosophy and German literature. He discontinued his studies in 1896. His friendship with Peter Altenberg began about this time.

In 1896 he left university without a diploma to begin work as an actor, stage director and performer, joining the Jung Wien (Young Vienna) group, which included Peter Altenberg, Leopold Andrian, Hermann Bahr, Richard Beer-Hofmann, Felix Dörmann, Hugo von Hofmannsthal, and Felix Salten. In 1897, however, Kraus broke from this group with a biting satire Die demolierte Literatur (Demolished Literature), and was named Vienna correspondent for the newspaper Breslauer Zeitung. One year later, as an uncompromising advocate of Jewish assimilation, he attacked the founder of modern Zionism Theodor Herzl with his polemic Eine Krone für Zion (A Crown for Zion) (1898).

On April 1, 1899, he renounced Judaism and in the same year founded his own newspaper, Die Fackel (The Torch), which he continued to direct, publish, and write until his death, and from which he launched his attacks on hypocrisy, psychoanalysis, corruption of the Habsburg empire, nationalism of the pan-German movement, laissez-faire economic policies, and numerous other subjects.

In 1901, Kraus was sued by Hermann Bahr and Emmerich Bukovics, who felt they had been attacked by Die Fackel. Many lawsuits by diverse offended parties would follow in later years. Also in 1901, Kraus found out that his publisher, Moriz Frisch, had taken over his magazine while he was absent on a months long journey: Moriz Frisch had registered the magazine's front cover as a trademark and published the Neue Fackel (New Torch). Kraus sued and won. From that time, Die Fackel was published (without a cover page) by the printer Jahoda & Siegel.

While at the beginning Die Fackel was similar to journals like the magazine Weltbühne, it became more and more a magazine that was privileged in its editorial independence, which Kraus could provide by his funding. Die Fackel printed what Kraus wanted to be printed. In its first decade, contributors included many well-known writers and artists such as Peter Altenberg, Richard Dehmel, Egon Friedell, Oskar Kokoschka, Else Lasker-Schüler, Adolf Loos, Heinrich Mann, Arnold Schönberg, August Strindberg, Georg Trakl, Frank Wedekind, Franz Werfel, Houston Stewart Chamberlain and Oscar Wilde. After 1911, however, Kraus was usually the sole author. Kraus' work was published nearly exclusively in Die Fackel, of which 922 irregularly issued numbers appeared in total. Authors who were supported by Kraus include Peter Altenberg, Else Lasker-Schüler, and Georg Trakl.

Die Fackel targeted corruption, journalists and brutish behaviour. Notable enemies were Maximilian Harden (in the mud of the Harden-Eulenburg affair), Moriz Benedikt (owner of the newspaper Neue Freie Presse), Alfred Kerr, Hermann Bahr, Imre Bekessy and Johannes Schober.

In 1902, Kraus published Sittlichkeit und Kriminalität (Morality and Criminal Justice), for the first time commenting on what was to become one of the main issues in his writings: the allegedly necessary defense of sexual morality by means of criminal justice (Der Skandal fängt an, wenn die Polizei ihm ein Ende macht, The scandal starts when the police is stopping it). Starting in 1906, Kraus published the first of his aphorisms in Die Fackel; they were collected in 1909 in the book Sprüche und Widersprüche (Sayings and Gainsayings).

In addition to his writings, Kraus gave numerous highly influential public readings during his career - between 1892 and 1936 he put on approximately 700 one-man performances, reading from the dramas of Bertolt Brecht, Gerhart Hauptmann, Johann Nestroy, Goethe, and Shakespeare, and also performing Offenbach's operettas, accompanied by piano and singing all the roles himself. Elias Canetti, who regularly attended Kraus' lectures, titled the second volume of his autobiography "Die Fackel" im Ohr ("The Torch" in the Ear) in reference to the magazine and its author. At the peak of his popularity, Kraus' lectures attracted four thousand people, and his magazine sold forty thousand copies.

In 1904, Kraus supported Frank Wedekind to make possible the staging in Vienna of his controversial play, Pandora's Box; the play told the story of a sexually-enticing young dancer who rises in German society through her relationships with wealthy men, but who later falls into poverty and prostitution. The frank depiction of sexuality and violence in these plays, including lesbianism and an encounter with Jack the Ripper, pushed the boundaries of what was considered acceptable on the stage at the time. Wedekind's works are considered among the precursors of the expressionists, but in 1914, when expressionist poets like Richard Dehmel sold themselves to war propaganda, Kraus would become a fierce critic of them.

In 1907, Kraus attacked his erstwhile benefactor Maximilian Harden because of his role in the Eulenburg trial in the first of his spectacular Erledigungen (Dispatches).

After 1911, Kraus was the sole author of most issues of Die Fackel.

One of Kraus' most influential satirical literary techniques, was his detournement of quotations. One example controversy arose with the text Die Orgie, which exposed how the newspaper Neue Freie Presse was blatantly supporting Austria's Liberal Party's election campaign; the text was conceived as a guerrilla prank and sent as a fake letter to the newspaper (Die Fackel will publish it later in 1911); the enraged editor, which fell into the trick, responded by suing Kraus for "disturbing the serious business of politicians and editors".

After an obituary for Franz Ferdinand who had been assassinated in Sarajevo on 28 June 1914, Die Fackel was not published for many months. In December 1914, it appeared again with an essay "In dieser großen Zeit" ("In this grand time"): "In dieser großen Zeit, die ich noch gekannt habe, wie sie so klein war; die wieder klein werden wird, wenn ihr dazu noch Zeit bleibt; … in dieser lauten Zeit, die da dröhnt von der schauerlichen Symphonie der Taten, die Berichte hervorbringen, und der Berichte, welche Taten verschulden: in dieser da mögen Sie von mir kein eigenes Wort erwarten." ("In this grand time that I still know from when it was very small; that will become small again if it has the time; … in this loud time that resounds from the ghastly symphony of deeds that spawn reports, and from reports that are to blame for deeds: in this one, you may not expect any word of my own.") In the subsequent time, Kraus wrote against the World War, and editions of Die Fackel were repeatedly confiscated or obstructed by censors.

Kraus' masterpiece is generally considered to be the massive satiric play about the First World War, Die letzten Tage der Menschheit (The Last Days of Mankind), which combines dialogue from contemporary documents with apocalyptic fantasy and commentary from two characters called "the Grumbler" and "the Optimist". Kraus began to write the play in 1915 and first published it as a series of special Fackel issues in 1919. Its epilogue, "Die letzte Nacht" ("The last night") had already been published in 1918 as a special issue. Edward Timms has called the work a "faulted masterpiece" and a "fissured text" because the evolution of Kraus' attitude during the time of its composition (from aristocratic conservative to democratic republican) means that the text has structural inconsistencies resembling a geological fault. The play was first staged, with more than sixty actors, by Italian director Luca Ronconi in Turin in 1991, soon after the First Gulf War.

Also in 1919, Kraus published his collected war texts under the title Weltgericht (World court of justice). In 1920, he published the satire Literatur oder Man wird doch da sehn (Literature or You Ain't Seen Nothing Yet) as a reply to Franz Werfel's Spiegelmensch (Mirror man), an attack against Kraus.

During January 1924, he started to fight against Imre Békessy, publisher of the tabloid Die Stunde (The Hour). Kraus accused Békessy of extorting money from restaurant owners by threatening them with bad reviews in his paper unless they paid him. Békessy retaliated with a libel campagne against Kraus, who in turn launched an Erledigung with the catchphrase "Hinaus aus Wien mit dem Schuft!" ("Throw the scoundrel out of Vienna"). In 1926, Békessy indeed fled Vienna in order to avoid being arrested. Békessy achieved some later success when his novel Barabbas was the monthly selection of an American book club.

In 1927, a peak in Kraus's political commitment was his sensational attack on powerful Vienna police chief Johann Schober, also former two terms chancellor, after 84 people were shot dead in the police massacre of the July Revolt. Karl Kraus produced a poster that in a single sentence requested Schober's resignation; the poster was published all over Vienna and is considered an icon of Austrian 20th century history.

In 1928, the play Die Unüberwindlichen (The insurmountables) was published. It included allusions to the fights against Békessy and Schober. During that same year, Kraus also published the records of a lawsuit that Kerr had filed against him after Kraus had published Kerr's war poems in Die Fackel. In 1932, Kraus translated Shakespeare's sonnets.

Kraus supported the Social Democratic Party of Austria since at least the early 1920s. And in 1934, estranging himself from some of his followers, he supported Engelbert Dollfuss' coup d'état that established the Austrian fascist regime, hoping Dollfuß could prevent Nazism from engulfing Austria.

One of his last works, which he declined to publish for fear of Nazi reprisals, was the verbally rich, densely allusive anti-Nazi polemic Die Dritte Walpurgisnacht (The Third Walpurgis Night) of 1933. This satire on Nazi ideology begins with the now-famous sentence, "Mir fällt zu Hitler nichts ein" (Hitler brings nothing to my mind). However, lengthy extracts appear in his apologia for his silence at Hitler's coming to power, Warum die Fackel nicht erscheint (Why the Fackel Does Not Appear), a 315-page edition of his periodical. The last issue of the Fackel appeared in February 1936. Karl Kraus died of an embolism of the heart in Vienna on June 12, 1936 after a short illness.

Kraus never married, but from 1913 until his death, he had a conflict-prone but close relationship with the Baroness Sidonie Nádherný von Borutin (1885 – 1950). Many of his works were written in the Janowitz castle, a Nádherny family property. Sidonie Nádherny became an important pen-friend and addressee of books and poems.

In 1911 he was baptized as a Catholic, but in 1923, disillusioned over the Church's support for the war, he left the Catholic Church, claiming sarcastically that he was motivated "primarily by antisemitism", i.e. indignation at Max Reinhardt's use of the Kollegienkirche in Salzburg as the venue for a theatrical performance. Kraus is buried in the Zentralfriedhof cemetery outside Vienna.

Kraus was the subject of two books written by noted libertarian author Dr. Thomas Szasz. Karl Kraus and the Soul Doctors and Anti-Freud: Karl Kraus's Criticism of Psychoanalysis and Psychiatry portrayed Kraus as a harsh critic of Sigmund Freud and of psychoanalysis in general. Other commentators, such as Edward Timms, have argued that Kraus respected Freud, though with reservations about the application of some of his theories, and that his views were far less black-and-white than Szasz suggests.