In the city of Whoville, everyone celebrates Christmas with much happiness and joy, with the exception of the cynical and misanthropic Grinch (Jim Carrey), who despises Christmas and the Whos with great wrath and occasionally pulls dangerous and harmful practical jokes on them. As a result, no one likes or cares for him. Meanwhile, the postman's daughter, Cindy Lou (Taylor Momsen), who is six years old, believes everyone is missing the point about Christmas when they are more concerned about the gifts. After finding him messing up the mail in the post office, Cindy Lou becomes aware of the Grinch's existence, and starts to become interested in the Grinch and his history, asking everyone what they know about him, and soon discovers that he has a tragic past.

The Grinch actually arrived in Whoville by mistake due to a wrong wind when he was a baby, and was adopted by two elderly sisters. Although he showed some sadistic tendencies as a child, he was not the cruel and selfish person who he later became; he was ridiculed by classmates (particularly by Augustus May Who, the current Mayor of Whoville) because of his appearance, with the exception of Martha May Whovier, who was courted by both the Grinch and May Who. On Christmas, he made a gift for Martha, but attempted to shave his face, cutting himself and opening himself to the ridicule of his classmates. He lost his temper, wreaked havoc in the classroom, and ran away to live on Mt. Crumpit. He never returned home, and became an urban legend due to brief sightings.

Cindy Lou, touched by this story, decides to make the Grinch the main participant of the Whobilation, to the great displeasure of May Who, who reluctantly agrees after pressure from the townspeople, who have been warmed by Cindy Lou's generous spirit. When Cindy Lou goes to Mt. Crumpit and offers an invitation to the Grinch, he turns her down. He gradually changes his mind, however, due to the promise of an award, and arrives late to the proceedings, but is forced to participate in the celebration. Just as the Grinch is enjoying himself and is almost won over, May Who gives him an electric shaver as a present, reminding him of his humiliation at school and angering him. May Who then asks Martha to marry him, promising her a new car in return. This and the ensuing laughter from all the Whos causes the Grinch to openly criticize the Whos for thinking that Christmas is about gifts that they will just dispose of later, in the hopes of making them too ashamed to celebrate the holiday. He then goes on to ruin the party and upset Cindy Lou.

When he realizes his attack has not removed the spirit of Christmas from the Whos, the Grinch becomes outraged, and concocts a plan to steal all of their presents while they sleep. Creating a Santa suit and sleigh, the Grinch goes around Whoville, stealing all of the Whos' Christmas gifts. He is almost discovered by Cindy Lou, but concocts a lie that allows him to get away. The next day, the Whos discover the Grinch's scheme, and May Who denounces Cindy Lou as the root of the catastrophe. However, her father, Lou Lou Who, reminds everyone that they still have the Christmas Spirit and that the principal meaning of Christmas is to spend it with family and friends. The people accept his speech and begin to sing. Hoping that the change of mood would inspire the Grinch, Cindy Lou goes to Mt. Crumpit to find him.

The Grinch reveals that he intends to destroy all of the stolen gifts after he hears the Whos crying. However, instead of crying, he hears the joyful singing of the Whos. Frustrated at the failure of his plan, the Grinch realizes that Christmas means much more than material gifts, an insight that profoundly touches him and makes his heart grow three times its original size. When the stolen gifts begin to fall off the cliff, the Grinch desperately tries to save them to no avail. However, when he realizes Cindy Lou has come to wish him a merry Christmas and is in danger of falling off the cliff with the sleigh, the Grinch finds enough strength to lift the gifts and Cindy Lou to safety. After a long descent down Mt. Crumpit, the Grinch returns to Whoville with Cindy and the gifts. He confesses to the burglary and apologizes for his actions towards the Whos, who reconcile with the Grinch. Martha turns down May Who's proposal and decides to stay with the Grinch instead. The redeemed Grinch starts a new life with the Whos, and commemorates the Christmas feast with them in his cave.