Dano was born in New York City, the son of Gladys and Paul Dano. He spent the first few years of his childhood in New York City and initially attended the Browning School, while his father worked as a businessman in New York.
While he was still a child, Dano's family moved from New York to New Canaan, Connecticut, finally settling in Wilton, Connecticut, where Dano continued his education at Wilton High School, graduating in 2002 to further attend Eugene Lang College in New York, NY.
As a child he was involved in community theatre, and while performing in New Canaan his parents were encouraged to take him to New York City. At age 10, he was quickly scouted for roles in plays on Broadway, making his debut at age 12 in a revival of Inherit the Wind along with George C. Scott and Charles Durning. At age 17, Dano acted in his first major film role as Howie in L.I.E.
After appearing as Howie Blitzer in L.I.E., Dano appeared in Little Miss Sunshine as Dwayne. Dano was aged 20 at the time of filming.
He then played Eli and Paul Sunday in Paul Thomas Anderson's There Will Be Blood. There Will Be Blood landed him a BAFTA award nomination for Best Supporting Actor, but he lost to Javier Bardem for No Country for Old Men. There Will Be Blood brought him positive reviews, with Texas Monthly saying that his performance was "so electric that the movie sags whenever he's not around." and Peter Travers remarking "All praise to the baby-faced Dano...for bringing sly cunning and unexpected ferocity to Plainview's most formidable opponent."
Dano continues working in other, mostly independent, films. He is also active on stage, and has appeared in several Broadway productions including Inherit the Wind, A Month in the Country, A Thousand Clowns at the Roundabout Theatre and the Ethan Hawke directorial debut Things We Want during its 2007 off-Broadway run.
As a side project, he provides vocals and lead guitar for the band Mook. Two of his musical influences are The Beatles and Led Zeppelin.
Rolling Stone magazine included Dano in its Hot List for 2007, calling his performance style "Daniel Day-Lewis + Billy Crudup × Johnny Depp."