Nelson earned a B.A. in philosophy from Swarthmore College in 1959. While there, he made an experimental humorous student film, The Epiphany of Slocum Furlow, in which the titular hero discovers the meaning of life. His contemporary at the college, musician and composer Peter Schickele, scored the film. Following a year of graduate study in sociology at the University of Chicago, Nelson began graduate work in philosophy at Harvard University in 1960, ultimately earning an A.M. in sociology from the Department of Social Relations in 1963. During his graduate studies, Nelson was a photographer and filmmaker at John C. Lilly’s Communication Research Institute in Miami, Florida, where he briefly shared an office with Gregory Bateson. He began to neglect his formal studies and failed his doctoral comprehensive examination, ultimately precipitating his departure from Harvard. From 1964 to 1966, he was an instructor in sociology at Vassar College.

Nelson founded Project Xanadu in 1960, with the goal of creating a computer network with a simple user interface. The effort is documented in the books Computer Lib / Dream Machines (1974), The Home Computer Revolution (1977) and Literary Machines (1981). Much of his adult life has been devoted to working on Xanadu and advocating for it.

In 1965, he presented the paper “Complex Information Processing: A File Structure for the Complex, the Changing, and the Indeterminate” at the ACM National Conference, in which he coined the term “hypertext”.

In 1976, Nelson co-founded and briefly served as the advertising director of the “itty bitty machine company”, or “ibm”, a small computer retail store that operated from 1977 to 1980 in Evanston, Illinois. The itty bitty machine company was one of the few retail stores to sell the Apple I computer. In 1978, he had a significant impact upon IBM’s thinking when he outlined his vision of the potential of personal computing to the team that three years later launched the IBM PC.

From 1980 to 1981, he was the editor of Creative Computing. At the behest of Xanadu developers Mark S. Miller and Stuart Greene, Nelson joined San Antonio, Texas-based Datapoint as chief software designer (1981-1982), remaining with the company as a media specialist and technical writer until its Asher Edelman-driven restructuring in 1984. Following several San Antonio-based consultancies and the acquisition of Xanadu technology by Autodesk in 1988, he continued working on the project as a non-managerial Distinguished Fellow in the San Francisco Bay Area until the divestiture of the Xanadu Operating Group in 1992–1993.

In January 1988 Byte magazine published an article about Nelson’s ideas, titled “Managing Immense Storage”. This stimulated discussions within the computer industry, and encouraged people to experiment with Hypertext features.

In 1998, at the Seventh WWW Conference in Brisbane, Australia, Nelson was awarded the Yuri Rubinsky Memorial Award.

In 2001, he was knighted by France as Officier des Arts et Lettres. In 2007, he celebrated his 70th birthday by giving an invited lecture at the University of Southampton. In 2014, ACM SIGCHI honored him with a Special Recognition Award.

Much later in life, he obtained his Ph.D. in media and governance from Keio University in 2002.

As of 2011, Nelson was working on a new information structure, ZigZag, which is described on the Xanadu project website, which also hosts two versions of the Xanadu code. He also developed XanaduSpace, a system for the exploration of connected parallel documents (an early version of this software may be freely downloaded).

From the 1960s to the mid-2000s, Nelson built an extensive collection of direct advertising mail he received in his mailbox, mainly from companies selling products in IT, print/publishing, aerospace, and engineering. In 2017, the Internet Archive began to publish it online in scanned form, in a collection titled “Ted Nelson’s Junk Mail Cartons”.