Hansel Schmidt is a girly-boy in East Germany who loves rock music. As a teen, Hansel falls in love with Luther, an American soldier. Luther reciprocates, planning to marry Hansel out of the country. The only catch in this plan is that Hansel must undergo a sex change for the marriage to be legitimate. Hansel's mother provides her personal information, including her passport, to her child for after the surgery. However, the surgery is butchered and leaves the newly-christened Hedwig with an inch long lump of flesh between her legs.
The marriage lasts a year, with Luther leaving for a man on their anniversary. Additionally, the Berlin Wall is destroyed, signaling German's reunification and driving home how worthless Hedwig's sacrifice was. Emboldened, Hedwig decides to form a rock band initially composes of Korean Army wives. Hedwig winds up becoming friends with the shy and introverted Tommy Speck. Hedwig finds Tommy charming, referring to him as her "other half," and musically inspires the boy, even giving him the stage name of "Tommy Gnosis." Unable to love Hedwig the way she wants, Tommy eventually leaves her and becomes a wildly successful singer due to stealing Hedwig's songs to him.
Hedwig decides to tour her new band, the Angry Inch, performing within the same venues as Tommy's concert schedule, albeit in strip malls and coffee joints. The entire reason behind such a touring schedule is in an effort to sue him for copyright infringement. Eventually the struggle really gets to Hedwig, where he starts working as a prostitute. It's during this period that Tommy finds her and reconciles. Shortly thereafter, paparazzi reveal this to the world, causing an influx of popularity between Tommy and Hedwig. Hedwig angrily performs for a massive crowd, removing every element of drag costuming to her audience's shock.
The final section of the film involves a male Hedwig and Tommy alone on a large stage, with Tommy singing apologies and praises to Hedwig. The perspective then shifts to a heavenly realm, with Hedwig's band entirely in white. Hedwig tosses her wig to a band member and walks through an alley, completely naked.