The town was founded in 1699 by French Huguenots fleeing persecution in France. Though initially named Sieburg, the town was later named after Charles I, Landgrave of Hesse-Kassel, who granted them refuge. The German Huguenot Museum located here contains a picture archive, library, and family histories of the Huguenots in Germany. Charles I, Landgrave of Hesse-Kassel, had ambitious plans for town-planning and developing new water trade channels in the region; including a 'haven' in Karlshafen. Together with his engineer and architect Friedrich Conradi he developed plans for a Landgrave-Carl-Canal in order to avoid customs duty at Hannoversch Münden, but these were never finalised. Plans for Bad Karlshafen, however, were partially completed in a baroque style by architect Paul du Ry in 1717 and the town was renamed as Carlshaven.
Since 1977 Karlshafen has spa status, which is when it received the title 'Bad'.