Macpherson was born at Ruthven in the parish of Kingussie, Badenoch, Inverness-shire.In 1753, he was sent to King's College, Aberdeen, moving two years later to Marischal College (the two institutions later became the University of Aberdeen). He then went to Edinburgh for just over a year, but it is unknown whether he studied at the university. He is said to have written over 4,000 lines of verse while a student; some of this was later published, notably The Highlander (1758), which he is said to have tried to suppress afterwards.

On leaving college, he returned to Ruthven to teach in the school there. At Moffat he met John Home, the author of Douglas, for whom he recited some Gaelic verses from memory. He also showed him manuscripts of Gaelic poetry, supposed to have been picked up in the Scottish Highlands and the Western Isles. Encouraged by Home and others, he produced a number of pieces translated from the Scottish Gaelic, which he reportedly spoke, which he was induced to publish at Edinburgh in 1760 as Fragments of Ancient Poetry collected in the Highlands of Scotland.

Dr. Hugh Blair, who was a firm believer in the authenticity of the poems, raised a subscription to allow Macpherson to pursue his Gaelic researches.In the autumn he set out to visit western Inverness-shire, the islands of Skye, North Uist, South Uist and Benbecula. He obtained manuscripts which he translated with the assistance of a Captain Morrison and the Rev. Gallie. Later he made an expedition to the Isle of Mull, where he obtained other manuscripts.

In 1761 he announced the discovery of an epic on the subject of Fingal (related to the Irish mythological character Fionn mac Cumhaill/Finn McCool) written by Ossian (based on Fionn's son Oisín), and in December he published Fingal, an Ancient Epic Poem in Six Books, together with Several Other Poems composed by Ossian, the Son of Fingal, translated from the Gaelic Language, written in the musical measured prose of which he had made use in his earlier volume. Temora followed in 1763, and a collected edition, The Works of Ossian, in 1765. The name Fingal or Fionnghall means "white stranger",

and it is suggested that the name was rendered as Fingal through a derivation of the name which in old Gaelic would appear as Finn.

The authenticity of these so-called translations from the works of a 3rd century bard was immediately challenged by Irish historians, especially Charles O'Conor, who noted technical errors in chronology and in the forming of Gaelic names, and commented on the implausibility of many of MacPherson's claims, none of which MacPherson was able to refute. More forceful denunciations were later made by Dr. Samuel Johnson, who asserted (in A Journey to the Western Islands of Scotland, 1775) that MacPherson had found fragments of poems and stories, and then woven them into a romance of his own composition. Further challenges and defences were made well into the nineteenth century, but the issue was moot by then. Macpherson never produced the originals that he claimed existed.

In 1764 he was made secretary to the colonial governor George Johnstone at Pensacola, Florida. He returned to Great Britain two years later, and, despite a quarrel with Johnstone, was allowed to retain his salary as a pension.

He went on to write several historical works, the most important of which was Original Papers, containing the Secret History of Great Britain from the Restoration to the Accession of the House of Hanover, to which are prefixed Extracts from the Life of James II, as written by himself (1775). He enjoyed a salary for defending the policy of Lord North's government, and held the lucrative post of London agent to the Nawab of Arcot. He entered parliament in 1780, as Member of Parliament for Camelford and continued to sit for the remainder of his life.

In his later years he bought an estate, to which he gave the name of Belville, in his native Invernessshire, where he died at the age of 59.Macpherson's remains were carried from Scotland and interred in the Abbey Church of Westminster.

After Macpherson's death, Malcolm Laing, in an appendix to his History of Scotland (1800), propounded the extreme view that the so-called Ossianic poems were altogether modern in origin, and that Macpherson's authorities were practically non-existent. Much of Macpherson's matter is clearly his own, and he conflated stories belonging to different cycles.

Despite the above some critics claim that Macpherson nonetheless produced a work of art which by its deep appreciation of natural beauty and the melancholy tenderness of its treatment of the ancient legend did more than any single work to bring about the romantic movement in European, and especially in German, literature. It was speedily translated into many European languages, and Herder and Goethe (in his earlier period) were among its profound admirers. Goethe incorporated his translation of a part of the work into his novel The Sorrows of Young Werther. Melchiore Cesarotti's Italian translation was reputedly a favourite of Napoleon.

His legacy indirectly includes the naming of Fingal's Cave on the island of Staffa. The original gaelic name is "An Uamh Bhin" ("the melodious cave"), but it was renamed by Sir Joseph Banks in 1772 at the height of Macpherson's popularity.