Throughout the 1991–92 school year, Charlie, the fifteen-year-old (later sixteen-year-old) protagonist, begins writing letters about his own life to an unknown recipient addressed, "Dear Friend." In these letters, he discusses his freshman year of high school and his struggles with two traumatic experiences: the suicide of his only middle-school friend, Michael Dobson, and the death of his favorite aunt, Helen.
His caring English teacher, who encourages Charlie to call him Bill, notices Charlie's passion for reading and writing, and acts as a mentor by assigning him extracurricular books and reports. Although he is a wallflower, Charlie is befriended by two seniors: Patrick and Sam. Patrick is secretly dating Brad, a football player, and Sam is Patrick's stepsister. Charlie quickly develops a consuming crush on Sam and subsequently admits this to her. It is revealed that Sam was sexually abused as a child, and she kisses Charlie to ensure that his first kiss is from someone who truly loves him.
Similar to his own experience, Charlie witnesses his sister's boyfriend hit her across the face, but she forbids him from telling their parents. He eventually mentions the occurrence to Bill, who tells Charlie's parents about it. Charlie's relationship with his sister rapidly deteriorates and she continues to see her boyfriend against her parents' wishes. Eventually, he discovers that his sister is pregnant and agrees to bring her to an abortion clinic without telling anyone. His sister breaks up with her boyfriend, after which her relationship with Charlie begins to improve significantly.
Charlie is accepted by Sam and Patrick's group of friends and begins using tobacco, alcohol and other drugs. At a party, Charlie trips on LSD. He cannot control his flashbacks of Aunt Helen, who died in a car crash on her way to buy him a birthday gift. He ends up in the hospital after falling asleep in the snow. At a Rocky Horror Picture Show performance, Charlie is asked to fill in as Rocky for Sam's boyfriend Craig, who was unable to attend the show that night. Their friend Mary Elizabeth is impressed and asks Charlie to the Sadie Hawkins dance and they enter into a desultory relationship. The relationship ends, however, during a game of truth or dare when Charlie is dared to kiss the prettiest girl in the room. He kisses Sam, and Mary Elizabeth storms out of the room in response. Following this, Patrick suggests that Charlie stay away from Sam for a while, and the rest of his friendship group shuns him. Without friends to distract Charlie from his thoughts and struggles, his flashbacks of Aunt Helen return.
Patrick and Brad's relationship is discovered by Brad's abusive father, and Brad disappears from school for a few days. Upon returning, Brad is cold and mean toward Patrick, while Patrick attempts to reconnect with him. However, when Brad derogatorily attacks Patrick's sexuality in public, Patrick physically attacks Brad until other football players join in and gang up on Patrick. Charlie joins in the fight to defend Patrick, and breaks it up, regaining the respect of Sam and her friends. Patrick begins spending most of his time with Charlie, and Patrick kisses Charlie impulsively but then apologizes. Charlie is sympathetic because he understands that Patrick is still recovering from his romance with Brad. Soon Patrick sees Brad engaging with a stranger in the park and Patrick is able to move on from the relationship.
As the school year ends, Charlie is anxious about losing his older friends—especially Sam, who is leaving for a summer college-preparatory program and has learned that her boyfriend cheated on her. When Charlie helps her pack, they talk about his feelings for her; she is angry that he never acted on them. They begin to engage sexually, but Charlie suddenly grows inexplicably uncomfortable and stops Sam. Charlie begins to realize that his sexual contact with Sam has stirred up repressed memories of him being molested by his Aunt Helen as a little boy. Charlie shows signs of PTSD from the incident and the revelation of his abuse helps the reader understand his views of relationships and love.
In an epilogue, Charlie is discovered by his parents in a catatonic state and does not show any movement despite being hit reluctantly by his father. After being admitted to a mental hospital, it is revealed that Helen actually sexually abused him when he was young—memories he had subconsciously repressed. This psychological damage explains his flashbacks and derealization phases throughout the book. In two months, Charlie is released, and Sam and Patrick visit him. In the epilogue, Sam, Patrick, and Charlie go through the tunnel again and Charlie stands up and exclaims that he feels infinite.
Charlie eventually comes to terms with his past: "Even if we don't have the power to choose where we come from, we can still choose where we go from there." Charlie decides to "participate" in life, and his letter-writing ends.
