Gramado was originally settled in 1875 by Portuguese immigrants. Five years later, the first German immigrants arrived and these were followed shortly after by Italian immigrants from the Italian settlements in Caxias do Sul.
In 1913, the town seat was moved to Linha Nova, the location of the present-day town center. At this time, Gramado was an unincorporated township within the municipality of Taquara. A railway arrived in Gramado in 1921, boosting the local economy. Gramado officially became a village in 1937, when Gramado was already known as a summer holiday resort. Gramado became a municipality on December 15, 1954 by force of State Act 2,522
