Iseltwald is first mentioned in 1146 as Iseltwalt.
During the Middle Ages, a castle was built on the peninsula near the village for the Lords of Matten. In 1146, King Conrad III gave Interlaken Abbey one quarter of the village. Over the following years, the Abbey attempted to expand their power in the village. After the Swiss Confederation gained de facto independence from the House of Habsburg, the Abbey remained a strong supporter of the Austrian dynasty. The Abbey launched several raids into Unterwalden to support Habsburg ambitions. In response, in 1342, troops from Unterwalden attacked and burned Iseltwald. A few years later, in 1348-49, the village unsuccessfully rebelled against the Abbey. In 1528, the city of Bern adopted the new faith of the Protestant Reformation and began imposing it on the Bernese Oberland. Iseltwald joined many other villages and the Abbey in an unsuccessful rebellion against the new faith. After Bern imposed its will on the Oberland, they secularized the Abbey and annexed all the Abbey lands.
Since 1948 it has been part of the large parish of Gsteig bei Interlaken in Gsteigwiler.
The traditional local economy relied on fish from Lake Brienz, farming in the valleys and seasonal alpine herding and farming in the alpine meadows. A glass blowing factory opened between 1680 and 1696 and operated until 1715. Beginning in 1871, tourists began coming across the lake on steam ships. However, there was only one large road into the village until 1988. Today the local economy is based on tourism, agriculture, fishing and timber harvesting.