Born in Hamburg, son of a police constable, Schmidt moved with his widowed mother to Lauban (in Lusatia, then Lower Silesia, now Polish) and visited the secondary school in Görlitz. He then worked as a clerk in a textile company in Greiffenberg. At the outset of World War II in 1939, Schmidt was drafted into the Wehrmacht. He first served in Alsace and after 1941 in fairly quiet Norway. In 1945, Schmidt volunteered for active duty at the front in Northern Germany in order to be granted a brief home visit, as was the custom. He used that visit to organize a defection from Lusatia westwards for him and his wife, in order to evade capture by the Red Army, which was famed for its abuse of prisoners of war (POW) and German civilians in the east, and gave himself up to British forces in the German province of Lower Saxony.
After an interlude as an English POW and later as an interpreter at a police school, Schmidt started his future life as a freelance writer during the time of wandering that followed the war. Since Schmidt's pre-war home in Lauban was in the part of Germany ethnically cleansed of Germans after the war and annexed to Poland, Schmidt became part of the throng of refugees moved by the authorities from village to village in West Germany. This included stints in Cordingen (in the Bomlitz county of Lower Saxony), Gau-Bickelheim, and Kastel (both in the newly formed province of Rhineland-Palatinate). In Kastel, he was accused in court of blasphemy and moral subversion, which was then still prosecuted in the Catholic parts of West Germany. As a result, Schmidt and his wife moved to the Protestant city of Darmstadt in Hesse, where the suit against him was dismissed. In 1958, the Schmidts moved to the small village of Bargfeld (near Celle) in Lower Saxony, where they were to stay (cf. Martynkewicz 1992).
Schmidt was a strict individualist, almost a solipsist. Disaffected by his experience of the Third Reich, he had an extremely pessimistic world view. In Schwarze Spiegel, he describes his utopia as an empty world after an anthropogenic apocalypse. Although he was a strict atheist, he maintained that the world was created by a monster called Leviathan, whose predatory nature was passed on to humans. Still, he thought this monster could not be too powerful to be attacked, if it behooved humanity.
His writing style is characterized by a unique and witty style of adapting colloquial language, which won him quite a few fervent admirers. Moreover, he developed an orthography by which he thought to reveal the true meaning of words and their connections amongst each other. One of the most cited examples is the use of “Roh=Mann=Tick” instead of “Romantik” (revealing romanticism as the craze of unsubtle men). The atoms of words holding the nuclei of original meaning he called Etyme (etyms).
His theory of etyms is developed in his magnum opus, Zettels Traum, in which an elderly writer comments on Edgar Allan Poe's works in a stream of consciousness, while discussing a Poe translation with a couple of translators and flirting with their teenage daughter. Schmidt also accomplished a translation of Edgar Allan Poe's works himself (1966—73, together with Hans Wollschläger).
In the 1960s, he authored a series of plays for German radio stations presenting forgotten or little known and - in his opinion - vastly underrated authors, as e.g. Johann Gottfried Schnabel, Karl Philipp Moritz, Leopold Schefer, Karl Ferdinand Gutzkow, et al. These "plays" are basically talks about literature with two or three participants plus voices for quotations (Schmidt lent his voice for his translations of Finnegans Wake quoted in Der Triton mit dem Sonnenschirm [1961]). 11 of these so called "Radio-Essays" were republished on 12 audio CDs in the year 2003.
As none of his works sold more than a few thousand copies, he lived in extreme poverty. During the last few years of his life, Arno Schmidt was financially supported by the philologist and writer Jan Philipp Reemtsma, the heir of the German cigarette manufacturer Philipp F. Reemtsma.
After a stroke, Arno Schmidt died in a hospital at Celle. The Arno Schmidt Foundation (Arno Schmidt Stiftung) in Bargfeld, dotated by Jan Philipp Reemtsma, is publishing his complete works.
The US entrepreneur and technology writer Dave Winer is a grandnephew of Arno Schmidt.