Chesnutt was born in Cleveland, Ohio, to Andrew Chesnutt and Ann Maria (Sampson) Chesnutt, both "free persons of color" from Fayetteville, North Carolina. His paternal grandfather was a white slaveholder and, based on his appearance, Chesnutt likely had other white ancestors. In fact, he himself claimed to be seven-eighths white, although he self-identified as African-American. Chesnutt could pass with relative ease for a white man, although he never chose to do so. Under the one drop rule in most of the South, Chesnutt was considered "legally" black.

After the Civil War, the family returned to Fayetteville when Charles was nine years old, where they ran a grocery store. It failed because of Andrew Chesnutt's poor business practices and the struggling economy of the South. By age 13 Charles was a pupil-teacher at the Howard School.

Chesnutt continued to study and teach, eventually becoming assistant principal of the normal school in Fayetteville, now known as Fayetteville State University. In 1878, he married Susan Perry and moved to New York City. He hoped to escape the prejudice and poverty of the South and wanted to pursue a literary career. After six months, the Chesnutts moved back to Cleveland, where he studied for and passed the bar exam in 1887. Chesnutt had learned stenography as a young man in North Carolina, and he established what became a lucrative legal stenography business in Cleveland.

Chesnutt began writing stories that were accepted by top-ranked national magazines including The Atlantic Monthly, which published his first short story, The Goophered Grapevine, in August 1887. His first book was a collection of short stories entitled The Conjure Woman, published in 1899. These stories featured black characters who spoke in dialect, as was popular in much southern literature at the time.

Chesnutt's stories were more complex than those of many of his contemporaries. He wrote about characters dealing with difficult issues of miscegenation, "passing", illegitimacy, racial identities and social place throughout his career. The issues were especially pressing in the social volatility of Reconstruction and late 19th century society, as whites in the South tried to press all people with any African ancestry into one lower caste. At the same time, there was often distance and competition between families who had long been free persons of color, especially if educated and property-owning, and newly freed slaves.

Chesnutt continued writing short stories, and also completed a biography of the abolitionist Frederick Douglass. He also wrote several novels and appeared on the lecture circuit. Although Chesnutt's stories met with critical acclaim, poor sales of his novels doomed his hopes of a self-supporting literary career. His last novel was published in 1905. In 1906, his play Mrs. Darcy’s Daughter was produced, but it was also a commercial failure. Between 1906 and his death in 1932, Chesnutt wrote and published little, except for a few short stories and essays.

Among the era's literary writers, Chesnutt was well-respected. In 1905, Chesnutt was invited to Mark Twain’s 70th birthday party in New York City.

Starting in 1901, Chesnutt again devoted himself to his stenography business and, increasingly, to social and political activism. He served on the General Committee of the National Association for the Advancement of Colored People (NAACP). Working with W. E. B. Du Bois and Booker T. Washington, he became one of the early 20th century's most prominent activists and commentators. Chesnutt contributed some short stories and essays to the NAACP's official magazine, The Crisis, founded in 1910. He did not receive compensation for the publication of these pieces. He wrote a strong essay protesting the southern states' moves to disfranchise blacks at the turn of the century.

In 1917, Chesnutt protested and successfully shut down showings in Ohio of the controversial film Birth of a Nation, which the NAACP officially protested across the nation.

Chesnutt died on November 15, 1932, at the age of 74 and was interred in Cleveland's Lake View Cemetery.

In terms of style and subject matter, the writings of Charles Chesnutt straddle the divide between the local color school of American writing and literary realism.

One of Chesnutt's most important works was The Conjure Woman (1899), a collection of stories set in postbellum North Carolina in which Uncle Julius, a freed slave, entertains a white couple from the North with fantastical tales of antebellum plantation life. Julius's tales feature such supernatural elements as haunting, transfiguration, and conjuring that were typical of folk tales. While Julius's tales recall the Uncle Remus tales published by Joel Chandler Harris, they differ in that Uncle Julius' tales offer oblique or coded commentary on the psychological and social impact of slavery and racial inequality. While controversy exists over whether Chesnutt's Uncle Julius stories reaffirmed stereotypical views of African Americans, most critics contend that their allegorical critiques of racial injustice were surely not lost on some readers. Only seven of the Uncle Julius tales were collected in the The Conjure Woman. Chesnutt wrote a total of fourteen Uncle Julius tales, which were later collected in The Conjure Woman and Other Conjure Tales, published in 1993.

1899 also saw the publication of Chesnutt's The Wife of His Youth and Other Stories of the Color-Line, a collection of short stories in the realist vein. Both collections were highly praised by the influential novelist, critic and editor William Dean Howells in a review published in the Atlantic Monthly entitled "Mr. Charles W. Chesnutt's Stories".

The House Behind the Cedars (1900) was Chesnutt’s response to what he believed were inadequate depictions of the complexity of race and the South's social relations. He believed that he could contribute a more realistic portrait of his region and community drawn from personal experience. He was also concerned with the silence around issues of passing and miscegenation and hoped to provoke political discussion through the novel.

The Marrow of Tradition (1901), a novel featuring the Wilmington Race Riot, marked a turning point for Chesnutt's writing. His early 20th-century works addressed political issues more directly and confronted uncomfortable topics like racial "passing", lynching, and miscegenation. Many reviewers condemned the novel's overt politics. Even some of Chesnutt's supporters like William Dean Howells openly regretted its "bitter, bitter" tone. Middle-class white readers who had been the core audience for Chesnutt's earlier works found the novel's content shocking and, for some, offensive. It sold poorly.

Overall, Chesnutt's writing style is formal and subtle, demonstrating little emotive power. A typical sentence from his fiction is a passage from The House Behind the Cedars: "When the first great shock of his discovery wore off, the fact of Rena's origin lost to Tryon some of its initial repugnance--indeed, the repugnance was not to the woman at all, as their past relations were evidence, but merely to the thought of her as a wife." Chapter XX, DIGGING UP ROOTS.

The Harlem Renaissance eclipsed much of Chesnutt's remaining literary reputation. New writers regarded him as old-fashioned and pandering to racial stereotypes. Chesnutt was relegated to minor status.

A long process of critical discussion and re-evaluation starting in the 1960s has revived Chesnutt's reputation. In particular, critics have focused on the writer's complex narrative technique, subtlety, and use of irony. Several commentators have noted that Chesnutt broke new ground in American literature with his innovative explorations of racial identity, use of African-American speech and folklore, and the way in which he exposed the skewed logic of Jim Crow strictures. Chesnutt's longer works laid the foundation for the modern African-American novel.

Several of Chesnutt's novels have been published posthumously. In 2002, the Library of America added a major collection of Chesnutt's fiction and non-fiction to its important American authors series, under the title Stories, Novels And Essays: The Conjure Woman, The Wife of His Youth & Other Stories of the Color Line, The House Behind the Cedars, The Marrow of Tradition, Uncollected Stories, Selected Essays (Werner Sollors, ed.).

Chesnutt's views on race relations put him somewhere between Du Bois' talented tenth and Booker Washington's separate but equal positions. In a speech delivered in 1905 to the Boston Historical and Literary Association and later published as an essay, titled "Race Prejudice; Its Causes and Its Cure," Chesnutt imagined a "stone by stone" dismantling of race antagonism as the black middle class grew and prospered. Filled with numbers and statistics, Chesnutt's speech/essay chronicled black achievements and black poverty. He called for full civil and political rights for all African Americans.

He had little tolerance for the new ideology of race pride, and he envisioned instead a nation of "one people molded by the same culture." He concluded his remarks with the following statement, made 58 years before Martin Luther King's I Have a Dream speech--

Emmy Award-winning film producer and filmmaker at Duke University Dante James Film/Video/Digital at Duke University produced a short dramatization of Chesnutt's short story The Doll in 2007. Insight News | Dante James: "The Doll" Interview The short story was adapted for the screen as part of a course entitled “Adapting Literature, Producing Film”. The film premiered at the San Diego Black Film Festival on January 31, 2008 where Clayton LeBouef won an award for "Best Actor". It also won "Best Short Film" at The Sweet Auburn International Film Festival and at the Hollywood Black Film Festival it won the "Short Film" award. Chesnutt submitted The Doll to Atlantic Monthly in early 1904, but the story was not accepted for publication. Eight years later he published the story in the NAACP's magazine The Crisis in April 1912.

When the USPS honored Chesnutt with a stamp in 2008 in its Black Heritage Series, the Cleveland Public Library held a first-day-issue ceremony to celebrate his legacy. The stamp was designed from a 1908 photograph of Chesnutt in the special collections library at Fisk University. California artist Kazuhiko Sano painted his portrait.