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Founded by Norwegian immigrant Jorgen Eliason in the 1880s, Poulsbo was settled in its early years by a large number of Norwegian and other Scandinavian immigrants because of its similarities to their native countries. In 1886, I.B. Moe, one of the early Norwegian settlers, suggested that the community should have a post office. Moe suggested the town be named Paulsbo (which translates as "Paul's place"), after the Norwegian village where Moe spent his early years. The community's petition for a post office was granted, and Moe became the first postmaster, but the authorities in Washington D.C. misspelled the town's name, probably because of illegible handwriting, and the community became known as Poulsbo thereafter. Poulsbo was officially incorporated on December 18, 1907.

Until World War II, many Poulsbo residents retained Norwegian as a primary language. However, during World War II, the military constructed about 300 residential units to provide housing for workers at the nearby Puget Sound Naval Shipyard, located in Bremerton, Washington. The population of Poulsbo almost tripled over three years, and the diversification of the population led to the dominance of English as the primary language.

On October 22, 1975, King Olav V of Norway visited Poulsbo as part of the celebration of 150 years of Norwegian settlement in the United States.