He wrote that he was born in São Paulo, Brazil on Christmas Day in 1931, but immigration records show that he was born 6 years earlier in Cajamarca, Peru. He anglicized his name by changing the "ñ" (in Castañeda) into "n". He moved to the United States in the early 1950s and became a naturalized citizen in 1957. He was educated at the University of California, Los Angeles (UCLA) (B.A. 1962; Ph.D. 1970).

His first three books, The Teachings of don Juan: a Yaqui way of knowledge, A Separate Reality and Journey to Ixtlan were written while Castaneda was an anthropology student at UCLA. Castaneda wrote these books as if they were his research log describing his studies under a traditional shaman he identified as don Juan(used the name Juan Matus, but not the man's 'real' name). Castaneda was granted his masters and doctoral degrees for the work described in these books.

In Castaneda's first two books he describes that the Yaqui way of knowledge also required the heavy use of powerful psychoactive or entheogenic plants, such as peyote and datura. Many young people used the apparent authoritative endorsement of psychoactive drug use to justify their own use of psychoactive drugs.

In his third book, Journey to Ixtlan, he essentially reverses his emphasis on 'power plants'. In this book he describes don Juan telling him he only needed to use drugs with Carlos because Carlos was so dumb. In this book the way of knowledge that don Juan describes was perceived by some as resembling the newly popular New Age movement. Castaneda, however, emphatically denied any real similarity between them in several lectures.

Castaneda was a popular enough phenomenon for Time magazine to do a cover article on Castaneda on March 5, 1973 (Vol. 101 No. 10) that was five or six pages long.

His fourth book, Tales of Power, ended with Castaneda preparing to leap off a cliff that would mark his graduation from disciple to man of knowledge (actually a leap from the tonal into the unknown). Some writers thought this must necessarily mark the end of his series. They were very surprised to see he continued to produce more books. Despite an increasingly critical reception Castaneda continued to be very popular with the reading public. Castaneda went on to write fourteen books in all, and release 3 videos.

In 1997 Castaneda launched a law suit against his ex-wife, Margaret Runyon Castaneda, over her book, A Magical Journey with Carlos Castaneda; but this was dropped when Castaneda died.

The official story is that Castaneda died on April 27, 1998 from liver cancer. Little is known about his death. There was no public service, Castaneda was apparently cremated and the ashes were sent to Mexico.