Laufey Lín Bing Jónsdóttir was born on 23 April 1999 in Reykjavík, Iceland. Her father is Icelandic and her mother is Chinese, hailing from Guangzhou. Her mother is a classical violinist and her maternal grandfather, Lin Yaoji [zh], was a violin educator at the Central Conservatory of Music in China, which Laufey credits as partly inspiring her love of music. Her father is a finance executive. She has an identical twin sister named Júnía Lín Hua Jónsdóttir (Icelandic: [ˈjuːnia ˈliːn ˈjounsˌtouhtɪr̥]; simplified Chinese: 林华; traditional Chinese: 林華; pinyin: Lín Huá), who is a violinist and serves as her creative director.

She lived in Washington, D.C., for two years and then moved back to Reykjavík in 2008, where she studied at Háteigsskóli. Laufey started learning the piano at the age of four and the cello at the age of eight. She graduated from the Reykjavík College of Music, where she also studied singing, in 2018. She spent her childhood moving between Reykjavík and Washington, D.C., as well as visiting Beijing.

At age 15, Laufey performed as a cello soloist with the Iceland Symphony Orchestra. While in Iceland, Laufey participated in the 2014 edition of Ísland Got Talent—the Icelandic version of Got Talent—where she ended as a finalist. The following year she also appeared as a contestant on The Voice Iceland and reached the semi-finals. At the time, she was the youngest competitor in the series' history.

After high school, Laufey and her twin sister were together accepted to the University of St Andrews in Scotland, and she had intended to study economics while her sister eventually graduated from St Andrews with a degree in international relations. However, she attended Berklee College of Music in the United States instead after being awarded a presidential scholarship and graduated in 2021. As of October 2023, she resides in Los Angeles. 

In August 2023, it was announced that Laufey had signed a global publishing deal with Warner Chappell Music (WCM). Her second album, Bewitched, was released on 8 September 2023. A week before the release, she leaked the sheet music for fans to be able to pre-save the album. It was met with critical acclaim and garnered Laufey's first Grammy Award, for Best Traditional Pop Vocal Album at the 66th Annual Grammy Awards, where she performed with Billy Joel on his closing number, "Turn the Lights Back On". Laufey went on a year-long world tour to support the album. On 6 March 2024, she reissued the album as Bewitched: The Goddess Edition, which was preceded by the single "Goddess".

She announced her third album in 2025 with the release of its first single "Silver Lining" on April 3. The album name was later revealed by Laufey as A Matter of Time, which is set to be released on 22 August 2025.

Although Laufey was influenced by classical music, classical artists such as Frédéric Chopin, and played it from an early age, she turned to her father's records of female jazz musicians such as Ella Fitzgerald and Billie Holiday to develop her musical style. She has cited Fitzgerald and Chet Baker as her biggest artistic influences, naming the former as her favorite musician. Laufey also cited Taylor Swift, Norah Jones, and Adele as inspirations for her musicianship; she said "[Taylor Swift] has done for pop and country what I hope to do for jazz. She has managed to unite people across the world which is one of my main goals as a musician."

The genre of Laufey's music style has been subject for debate. She describes her genre as jazz or jazz pop, while organizations such as National Public Radio, the New York Times, and The Sydney Morning Herald have noted that her music includes elements of jazz, pop, bossa nova, and classical, describing the entirety as traditional pop or old-time pop due to the blend of styles in her songs into one.