The area was initially home to the Pawtucket Native Americans. Scots-Irish immigrants began to settle in the area in 1719. The region was known as "Nutfield," and included what are now the neighboring towns of Derry and Londonderry. By 1721 some of the original settlers petitioned to form a separate independent community.

Governor Benning Wentworth granted this request in 1742. One published theory holds that the community's name refers to Windham, Ireland, harkening back to the petitioners' homeland. However, it has been alternatively postulated that the town was named after Sir Charles Wyndham, 2nd Earl of Egremont, a member of Parliament from 1734 to 1750, Secretary of State for the Southern Department from 1761 to 1763, and a good friend of Governor Wentworth.

The town of Windham was originally a parish of Londonderry. Windham was the second town designated by Governor Benning Wentworth following the establishment of the New Hampshire-Massachusetts border. The first census ever taken in Windham reported 663 residents in 1790. Historic landmarks in Windham include the Searles School and Chapel, Searles Castle, the town center, and the Armstrong Memorial Building.

Searles Castle is one of Windham's most prominent landmarks. Edward Francis Searles, an interior decorator and antique collector, built the castle. The architect, Henry Vaughn, modeled the castle's architecture after the style of the Stanton Harcourt Manor in Oxfordshire, England. The building was completed in 1915 at a cost of over $1,250,000.

The castle contains over 20 rooms and is available to the public to be rented out for functions and events. In July 1909, Mr. Searles erected a commemorative plaque honoring Governor Dinsmoor "a few rods" from his birthplace on Jenny's Hill, which stands today as a designated historic landmark. In 2021, Windham attracted attention in the wake of the attempts to overturn the results of the 2020 United States presidential election.

Following the concurrent 2020 election to the New Hampshire House of Representatives, a Democratic candidate who lost her race by 24 votes requested a recount, only for the margin of victory for four Republican candidates to unexpectedly increase by 300 votes each. The results of the recount prompted the New Hampshire General Court to authorize an audit of Windham's ballot counting machines and hand tabulations.

When Windham declined to select an auditor endorsed by supporters of President Donald Trump, about 500 supporters marched at a town board meeting, protesting alleged incidents of fraud and forcing the meeting to be moved to a local high school. Trump and his adviser, Windham resident Corey Lewandowski, also commented on the controversial audit.

CNN reported that Trump supporters saw the audit as an opportunity to prove broader election integrity problems during the 2020 elections. The auditors said their assessments revealed no signs of fraud but rather "a confluence of errors".