She was born Kathleen Sue Nail in Fort Worth, Texas and moved to New York to pursue her dream of acting, landing her first role on the soap opera The Edge of Night.

Kate took the surname Capshaw upon her marriage to Robert Capshaw; they had one child, actress Jessica Capshaw, and eventually divorced.

Capshaw met film director Steven Spielberg upon winning the female lead (from a pool of 120 actresses) for the Raiders of the Lost Ark prequel, Indiana Jones and the Temple of Doom; although the film was a success, Capshaw's performance as the often shrieking heroine was widely panned and, in the opinion of many, had a very negative impact on her career and reputation, preventing her from acquiring more prestigious roles.

Capshaw converted to Judaism and wed the billionaire Jewish-American director Steven Spielberg on October 12, 1991; they had three children together biologically, and two adopted children.