Ale was the drink of Iceland's settlers, and from the Middle Ages hopped beer came in from abroad as Hamburg, Rostock and Lübeck ale. Home brewing faded by the 18th century; in the 19th century beer arrived again from Germany and Denmark, and around 1900 the newspapers advertised lager and porter from Carlsberg, Tuborg and other Danish brewers. A ban on alcohol took effect on 1 January 1915 after a referendum in 1908. Wine was allowed again from 1922 and spirits from 1935, but beer above 2.25% alcohol by volume stayed banned until 1 March 1989.

Light beer was allowed throughout. Ölgerðin Egill Skallagrímsson was founded in Reykjavík on 17 April 1913 by Tómas Tómasson, who began in two rented basement rooms with malt extract and white beer; Egils Pilsner followed in 1916, and a rival, Ölgerðin Þór (1930), merged into it in 1932. In the Second World War Ölgerðin got an exemption to brew Polar Ale for the British forces, and from 1951 it brewed Polar Beer, later Export Beer, for the American base at Keflavík. The brewery that became Víking began in 1939 as Efnagerð Siglufjarðar in Siglufjörður; by 1962 it had a plant at Furuvellir 18 in Akureyri, where Sana hf made light beer from 1966, with a strong Thule Export for export, and in 1978 it merged with the Reykjavík firm Sanitas. Viking Beer came out in 1984, mostly for export.

Strong beer was legalised by the Althing in May 1988, in force from 1 March 1989 and kept since as Beer Day. That day the state shops in Reykjavík sold five beers: Egils Gull, Sanitas Pilsner, Sanitas Lageröl, and imported Löwenbräu and Budweiser. The Akureyri firm became Víking hf in 1994, merged with Sól in 1997, and in 2001 with Vífilfell, the Coca-Cola bottler founded by Björn Ólafsson on 1 June 1942. The Spanish bottler Cobega bought Vífilfell in 2011, and in 2016 it joined Coca-Cola European Partners; its beer is brewed at Furuvellir, while Coca-Cola is bottled in Reykjavík. Ölgerðin, bought in 2007 by Októ Einarsson and Andri Þór Guðmundsson with Kaupthing bank, brews about 10 million of its 45 million litres a year; its Egils Gull was named World's Best Standard Lager at the World Beer Awards in 2011.

Craft brewing began on 22 August 2006, when Agnes and Ólafur, who had seen a news item about microbreweries in June 2005, brewed the first Kaldi at Árskógssandur with the Czech brewmaster David Masa; the brewery opened on 30 September, using Czech malt and hops and local spring water. Ölvisholt, a farm brewery in Flóahreppur, and Mjöður in Stykkishólmur followed in 2007. Ölgerðin started its own craft brewery, Borg, in 2010. Einstök, a company founded in 2010 by the Americans Jack Sichterman and David Altshuler, has been brewed since 2011 at Vífilfell's Akureyri plant, and Coca-Cola European Partners bought its Icelandic trademark in 2019 (Competition Authority case 27/2019). Steðji Brugghús opened in Borgarfjörður in 2012. A craft brewers' association was founded in 2018 and had 26 members in 2023. Since the summer of 2022 small breweries with a capacity under 500,000 litres may sell beer at the brewery.

Recent changes are small. On 12 October 2023 Ölvisholt announced that it had moved from its old barn to new premises at Grandatröð 4 in Hafnarfjörður. Kaldi is still a family business, and its nearby beer spa, Bjórböðin, is closed for now after a change of ownership in 2026. In October 2026 the Reykjavík brewpub Bryggjan, opened in 2015, was reported bankrupt for a second time. Of the 18 million litres of beer the state shops sold in 2022, 17 million were lager.