In the opening scene, Danny Vinyard, a young white supremacist, sits outside the principal's office, where his history teacher explains to the principal, Dr. Sweeney, that Danny wrote a book report sympathetic to Adolf Hitler's Mein Kampf. After some discussion, Dr Sweeney calls Danny into his office and informs him that he will now be his history teacher, calling the class "American History X", and that his first assignment is to write a paper about his brother Derek.
The next scenes are flashbacks showing Derek's transformation into a vengeful white supremacist in Venice Beach having already been influenced by his firefighter father's latent racism, and is driven to action when his father is murdered by an African-American drug dealer.
Eventually Derek becomes second-in-command of a neo-Nazi gang, The DOC, and entices young whites to join by promising protection from predominantly non-white gangs. The gang commits acts of intimidation, such as damaging a store owned by a Korean and challenging basketball games against groups of black players. One night while Derek is with his girlfriend Stacey (Fairuza Balk) three blacks try to steal Derek's truck, which upon discovering Derek exits the house and violently confronts the men as Danny watches in horror.
Derek is sentenced to prison after being convicted with voluntary manslaughter where he joins the Aryan Brotherhood. He becomes disillusioned with the gang, especially over the group's friendly dealings with a Mexican gang. When he voices these opinions, he is quickly shut down by the other white supremacists, so Derek chooses to not associate with them any more and is beaten. It is while working in the prison laundry room that Derek gradually becomes friends with a black inmate named Lamont.
While in prison, Derek is visited by Dr. Sweeney, whom he asks for help to get out on parole. Sweeney informs him of Danny's aspirations of becoming a neo-Nazi like Derek and heading to right where he is. He confides in Derek that he used to hate white people as a youth, but he came to the realization that racism was pointless. Sweeney asserts that Derek has spent his life pursuing answers, and then asks him: "Has anything you've done made your life better?" This proves a turning point for Derek, who further distances himself from the Aryan Brotherhood and changes his outlook on life. Lamont emerges as his only true friend in prison.