Kraus was born into a wealthy Jewish family of Jacob Kraus, a papermaker, and his wife Ernestine, née Kantor, in Jičín, Bohemia (now 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 will become a fierce critic of them.