Thurman was born in Salt Lake City to Beulah and Oscar Thurman. Between his mother's many marriages, Wallace and his mother lived with Emma Jackson, his maternal grandmother. His grandmother's home doubled as a saloon where alcohol was served without a license. When Thurman was less than a month old, his father abandoned his wife and son. It was not until Wallace was 30 years old that he met his father.

Thurman's early life was marked by loneliness, family instability and illness. He began grade school at age six in Boise, Idaho, but his poor health eventually led to a two-year absence from school, during which he returned to Salt Lake City. From 1910 to 1914, Thurman lived in Chicago, but he would have to finish grammar school in Omaha, Nebraska. During this time, he suffered from persistent heart attacks. While living in Pasadena, California's lower altitude in the winter of 1918, Thurman came down with influenza during the worldwide Influenza Pandemic. Considering his history of illness, he surprisingly recovered and then returned to Salt Lake City, where he finished high school.

Throughout it all, Thurman was a voracious reader. He enjoyed the works of Plato, Aristotle, Shakespeare, Havelock Ellis, Flaubert, Charles Baudelaire and many others. He even wrote his first novel at the age of 10. He attended the University of Utah from 1919 to 1920 as a pre-medical student. However, in 1922 he transferred to the University of Southern California in Los Angeles, but he left without earning a degree. While in Los Angeles, he met and befriended Arna Bontemps and became first a reporter for an African-American-owned newspaper and then a columnist. He also started his first magazine, Outlet, which was intended to be a West Coast equivalent to The Crisis.

In 1925 Thurman moved to Harlem. In less than 10 years, he obtained various employments as a ghostwriter, a publisher, an editor, and a writer of novels, plays, and articles. The following year he became the editor of The Messenger, a socialist journal aimed at blacks. While at The Messenger, Thurman became the first to publish the adult-themed stories of Langston Hughes. Thurman left the journal in October 1926 to become the editor of a white-owned magazine called World Tomorrow. The following month, he collaborated in publishing the literary magazine Fire!! Devoted to the Younger Negro Artists, among whose contributors were Hughes, Zora Neale Hurston, Richard Bruce Nugent, Aaron Douglas, and Gwendolyn B. Bennett.

Only one issue of Fire!! was ever published. Fire!! challenged the ideas of W. E. B. Du Bois and many of the African American bourgeoisie, who, in their search for social equality and racial integration, believed that black art should serve as propaganda for those ends. The New Negro movement needed to show white Americans that blacks were not inferior.

But Thurman and others of the "Niggerati" (the deliberately ironic name Thurman used for the young African American artists and intellectuals of the Harlem Renaissance) wanted to show the real lives of African Americans, both the good and the bad. Thurman believed that black artists should be more objective in their writings and not so self-conscious that they failed to acknowledge and celebrate the arduous conditions of African American lives. As Singh and Scott put it, "Thurman's Harlem Renaissance is, thus, staunch and revolutionary in its commitment to individuality and critical objectivity: the black writer need not pander to the aesthetic preferences of the black middle class, nor should he or she write for an easy and patronizing white approval."

During this time, Thurman's rooming house apartment at 267 West 136th Street in Harlem became the main place where the African-American literary avant-garde and visual artists of the Harlem Renaissance met and socialized. Thurman and Hurston mockingly called the room "Niggerati Manor", in reference to all of the black literati who showed up there. The walls of Niggerati Manor were painted red and black, colors to be emulated on the cover of Fire!! Nugent painted murals on the walls, some of which contained homoerotic content.

In 1928, Thurman published another magazine called a Forum of Negro Life, whose contributors included Alain Locke, George Schuyler, and Alice Dunbar-Nelson. The publication lasted for only two issues. Afterwards, Thurman became a reader for a major New York publishing company, the first African American ever in such a position.

Thurman married Louise Thompson Patterson on August 22, 1928. The marriage lasted only six months. Thompson said that Wallace was a homosexual and thus their union was incompatible.

Thurman died at the age of 32 from tuberculosis, which many suspect was exacerbated by his long fight with alcoholism.

According to Langston Hughes, who noted Thurman's dark complexion in this statement, Thurman was "...a strangely brilliant black boy, who had read everything and whose critical mind could find something wrong with everything he read." Though it was to become the basis for some of his strongest writings, from the beginning Thurman's dark skin color was an issue, prompting negative comments and reactions from various black and white Americans.

Thurman wrote a play, Harlem, which debuted on Broadway in 1929 to mixed reviews. The same year his novel The Blacker the Berry: A Novel of Negro Life was published. The novel is now recognized as a groundbreaking work of fiction because of its focus on intraracial prejudice and colorism, specifically between light-skinned and dark-skinned black people.

Three years later Thurman published Infants of the Spring, a satire of the themes and the individuals of the Harlem Renaissance. He co-authored The Interne, a final novel with A.L. Furman, published in 1932.