Nelson was born and grew up in Madison, Wisconsin. There she first learned about R&B music from WLAC radio in Nashville. In her teens, Nelson sang folk music in coffeehouses and with a group called The Fuller's Wood Singers and was lead singer in a band called The Fabulous Imitations.
In 1964, Nelson recorded an acoustic blues album released on Prestige Records, Deep Are the Roots. It featured blues harmonica player Charlie Musselwhite among her backup band. In Chicago, where the album was recorded, Nelson met and learned from artists such as Muddy Waters, Howlin' Wolf, and Otis Spann.
Nelson moved to San Francisco in 1966, where she became part of the music scene there. Her band Mother Earth played the Fillmore Auditorium, sharing bills with the Grateful Dead, Jefferson Airplane, Janis Joplin and Jimi Hendrix. It was during this period that Nelson wrote and recorded, with Mother Earth on the album Living with the Animals, her signature song "Down So Low", later covered by Linda Ronstadt, Etta James, and Diamanda Galas.
In the late 1960s Nelson relocated to Nashville, where she and Mother Earth recorded the album Make A Joyful Noise and the solo effort Tracy Nelson Country. The latter features Nelson's cover of the country classic "Blue, Blue Day". Nelson made a total of six albums with Mother Earth for the Mercury, Reprise, and Columbia labels. She has continued to record as a solo artist, for Atlantic and other labels, including MCA, Flying Fish and Adelphi. In 1974, her duet with Willie Nelson, "After the Fire is Gone", was nominated for a Grammy Award. Her 1975 release Sweet Soul Music on the MCA label included Leon Pendarvis and Richard Tee on keyboards and the Sweet Inspirations, and featured covers of Don Nix's "Same Old Blues" and Bob Dylan's "I'll Be Your Baby Tonight".
After a lengthy hiatus from recording in the 1980s, Nelson released several albums on the independent Rounder Records label in the 1990s. Her 1998 collaboration with label-mates Marcia Ball and Irma Thomas "Sing It" garnered a second Grammy nomination. During this comeback period she performed on American music television programs such as Sunday Night and Austin City Limits.
Since the early 2000s, Nelson has recorded for various independent record labels. She released her first in concert album "Live From Cell Block D" in 2004. Other projects include a collaboration with blues-rock veterans Nick Gravenites, Harvey Mandel, Corky Siegel and Sam Lay. Billed as the Chicago Blues Reunion, the group toured major cities in 2005 and 2006.
In 2007, Tracy released You'll Never Be a Stranger at My Door, her first pure country effort since her 1969 album, Mother Earth Presents Tracy Nelson Country. Stranger included her covers of Johnny Cash's "I Still Miss Someone", Jim Reeves's "Four Walls"; the Everly Brothers' "I Wonder If I Care as Much" and a song based on a poem of her own composition, "Salt of the Earth".
In 2013, Nelson was nominated for a Blues Music Award in the 'Koko Taylor Award (Traditional Blues Female)' category.