Allen was born in Litchfield, Connecticut, the first child of Joseph and Mary Baker Allen. Ethan was the oldest of the eight children. He was the only one to be born in Litchfield, since the family moved to Cornwall shortly after his birth. His brother, Ira, figured prominently in the early history of Vermont. Joseph Allen was the leader of a rebellious group of land owners and speculators who held New Hampshire title to land grants in the New Hampshire Grants. New York, which held substantial claim to the area, refused to honor the New Hampshire titles and sold competing titles to different people, who generally did not live in Vermont. This led to open rebellion among the population in much of Vermont. In April of 1755, Joseph Allen died, leaving Ethan to take care of the family farm and title claims.

Allen was well over six feet tall, in a time when most men were a foot shorter. He was outspoken and apparently quite articulate. As a young man, he served in the colonial militia in the French and Indian War. He was married and had five children. In the early 1770s, he emerged as the military leader of Anti-New York dissidents, known as the Green Mountain Boys, who were fighting New York over the New Hampshire grants. He was apparently reasonably effective in that role. A warrant was issued for his arrest by the government of New York, for the substantial reward of 100 pounds.

In the spring of 1775, following the arrival of the Revolutionary War, Allen and Benedict Arnold led a raid against Fort Ticonderoga. The relative roles of Allen and Arnold are not entirely clear. Nor is it clear to what extent the campaign was formulated by the strongly anti-British faction in Connecticut, to what extent it was the idea of the Green Mountain Boys headquartered at the Catamount Tavern in Bennington, nor how much of the enthusiasm was fueled by alcohol rather than by patriotism. What is clear is that the rebels moved north, managed to get a few dozen men across Lake Champlain (they had considerable trouble finding a boat and the one they found was quite small).

In a dawn attack, Ticonderoga was taken from the 22 British troops that held it and who were not aware that a war was in progress. Allen/Arnold's rebels also quickly captured forts at Crown Point, Fort Ann on Isle La Motte near the present Canadian border, and (temporarily) the town of St John (now Saint-Jean-sur-Richelieu, Quebec). The comic opera aspects of this campaign notwithstanding, the huge stores of cannon and powder seized at Ticonderoga allowed the American rebels to put in place an effective siege of Boston which caused the British to evacuate in October of 1775.

The Green Mountain Boys elected Allen's cousin, Seth Warner, as leader; however, Allen commanded a small military force in the American rebels' campaign in Quebec in 1775. As a result of miscommunication or misjudgment, he attacked Montreal with a handful of men and was captured by the British. He was shipped to England where he was imprisoned in Pendennis Castle, Cornwall, and suffered considerable mistreatment. Allen was later transferred to New York, where he was eventually paroled in a prisoner exchange.

Allen then moved back to Vermont, which had become a hotbed of anti-everyone sentiment, harboring little affection for either England or for the nascent United States. Vermont was also harboring a significant number of deserters from the armies of both. Allen settled a homestead in the delta of the Winooski River near the modern city of Burlington. Allen remained active in Vermont politics and was appointed general in the Army of Vermont.

In 1778, Allen appeared before the Continental Congress on behalf of a claim by Vermont for recognition as an independent state. Allen then negotiated with the governor of Canada between 1780 and 1783, in order to establish Vermont as a British province. Because of this, the US charged him with treason; however, because the negotiations were demonstrably intended to force action on the Vermont case by the Continental Congress, the charge was never substantiated.

Allen's first wife died in 1783 and he remarried in that year. Allen died in 1789, of a stroke, at the age of 51. Two ships of the United States Navy have been named Ethan Allen in his honor, as well as Fort Ethan Allen, a cavalry outpost, in Colchester and Essex, Vermont.