Cao belonged to a Han Chinese clan, which later became part of the Plain White Branch (???) of the Manchu Eight Banners. Although forced into slavery (??) to Manchu royalty in the late 1610s, his ancestors distinguished themselves through military service and subsequently held posts in officialdom.

During the Kangxi Emperor's reign, the clan's prestige and power reached its height. Cao's grandfather, Cao Yin (??), was a former playmate to Kangxi, and Cao Yin's mother was a wet nurse of the emperor. Two years after his ascension, Kangxi appointed Cao's great-grandfather, Cao Xi (??), as the Commissioner of Imperial Textiles in Jiangning (????).

When Cao Xi died in 1684, Cao Yin, as Kangxi's personal confidante, took over the post. Cao Yin was one of the era's most prominent men of letters and a keen book collector. By the early 18th century, the Cao clan had become so rich and influential as to be able to play host four times to the Kangxi Emperor in his six separate itinerant trips south to the Nanjing region.

When Cao Yin died in 1712, Kangxi, still in power, passed the office over to Cao Yin's only son, Cao Yong (??). Cao Yong died in 1715. Kangxi then allowed the family to adopt a paternal nephew, Cao Fu (??), as Cao Yin's posthumous son to continue in that position. Hence the clan held the office of Imperial Textile Commissioner at Jiangning for three generations.

The family's fortunes lasted until Kangxi's death and the ascension of the Yongzheng Emperor to the throne. Yongzheng was much less tolerant of the debts the family chalked up in office. By 1727, after a series of warnings, he decided to confiscate the Cao clan's properties, including their mansion, and put Cao Fu under arrest. Many believe this purge was politically motivated. When Cao Fu was released a year later, the family, totally impoverished, was forced to relocate to Beijing. Cao Xueqin, still a young child then, followed the family in this odyssey.

Almost no records of Cao's early childhood and adulthood survive. Redology scholars are still debating Cao's exact date of birth, though he is known to be around forty to fifty at his death. Cao was the son of either Cao Fu or Cao Yong. It is known for certain that Cao Yong's only son was born posthumously in 1715; some redologists believe this son might be Cao Xueqin.

Most of what we know about Cao was passed down from his contemporaries and friends. Ca eventually settled in the western suburbs of Beijing where he lived the larger part of his later years in poverty selling off his paintings. Friends and acquaintances recalled an intelligent, highly talented man who spent a decade working diligently on a work that must have been Dream of the Red Chamber. They praised both his stylish paintings, particularly of cliffs and rocks, and originality in poetry, which they likened to Li He's. Cao died some time in 1763 or 1764, leaving his novel in a very advanced stage of completion. He was survived by a wife and at least one son.

Cao achieved posthumous fame through his life's work. The novel, written in "blood and tears", as a commentator friend said, is a vivid recreation of an illustrious family at its height and its subsequent downfall. A small group of close family and friends appears to have been transcribing his manuscript when Cao died quite suddenly in 1763-4. Extant handwritten copies of this work — some 80 chapters — had been in circulation in Beijing shortly after Cao's death and scribal copies soon became prized collectors' items.

In 1791, Cheng Weiyuan (???) and Gao E (??), who claimed to have access to Cao's working papers, published a "complete", edited 120-chapter version. This is its first moveable type print edition. Reprinted a year later with more revisions, this 120-chapter edition is the novel's most printed version. Modern scholars generally think the authorship of the 1791 ending — the last 40 chapters — to be in doubt.