The area was inhabited for thousands of years by American Indians, predominantly the Puyallup people, who lived in settlements on the delta.

In 1852, a Swede named Nicolas Delin built a water-powered sawmill on a creek near the head of Commencement Bay, but the small settlement that grew around it was abandoned during the Indian War of 1855–56. In 1864, pioneer and postmaster Job Carr, a Civil War veteran and land speculator, built a cabin (which also served as Tacoma's first post office; a replica was built in 2000 near the original site in "Old Town"). Carr hoped to profit from the selection of Commencement Bay as the terminus of the Transcontinental Railroad, and sold most of his claim to developer Morton M. McCarver (1807–1875), who named his project Tacoma City, derived from the indigenous name for the mountain.

Tacoma was incorporated on November 12, 1875, following its selection in 1873 as the western terminus of the Northern Pacific Railroad due to lobbying by McCarver, future mayor John Wilson Sprague, and others. However, the railroad built its depot on New Tacoma, two miles (3 km) south of the Carr–McCarver development. The two communities grew together and joined, merging on January 7, 1884. The transcontinental link was effected in 1887, and the population grew from 1,098 in 1880 to 36,006 in 1890. Rudyard Kipling visited Tacoma in 1889 and said it was "literally staggering under a boom of the boomiest".

The Commencement Bay Land and Improvement Co. played a major role in the city's early growth. George Francis Train was a resident for a few years in the late 19th century. In 1890, he staged a global circumnavigation starting and ending in Tacoma to promote the city. A plaque in downtown Tacoma marks the start and finish line.

In November 1885, white citizens led by then-mayor Jacob Weisbach expelled several hundred Chinese residents peacefully living in the city. As described by the account prepared by the Chinese Reconciliation Project Foundation, on the morning of November 3, "several hundred men, led by the mayor and other city officials, evicted the Chinese from their homes, corralled them at 7th Street and Pacific Avenue, marched them to the railway station at Lakeview and forced them aboard the morning train to Portland, Oregon. The next day two Chinese settlements were burned to the ground."

The discovery of gold in the Klondike in 1898 led to Tacoma's prominence in the region being eclipsed by the development of Seattle.

A major tragedy marred the end of the 19th century, when a streetcar accident resulted in significant loss of life on July 4, 1900.