Virginia Gayle Madsen was born in Chicago, Illinois, the daughter of Elaine Madsen, who became an Emmy Award-winning filmmaker and author, and Calvin Madsen, a firefighter. After Madsen's parents divorced in the late 1960s, when the children were young, her mother left a career in finance to pursue a career in arts, encouraged by film critic Roger Ebert. Madsen's siblings are Michael Madsen, an actor, and Cheryl Madsen, an entrepreneur. Her paternal grandparents were Danish, and her mother has English, Irish, Scottish, German and distant Native American ancestry. Madsen is a graduate of New Trier High School in Winnetka, Illinois. Madsen later attended the Ted Liss Acting Studio in Chicago, and Harand Camp Adult Theater Seminar in Elkhart Lake, Wisconsin. Of her experience with Liss, she said: "I had wanted to join his class since I was 12. It was well worth the wait because I don't think I could have got that sort of training anywhere else especially in the United States... I always wanted to make a real career out of acting."
Madsen made her acting debut at age 22, in a bit part where she landed her role as Lisa in the comedy film Class. She next appeared in Kenny Loggins' music video for "I'm Free " from the Footloose soundtrack. She portrayed a cellist named Madeline in Electric Dreams, the first film was released by Virgin Films Production Company. She was cast as Princess Irulan in David Lynch's science fiction epic Dune. In 1986, she starred as Boris' romantic interest Barbara in the film Creator, which also starred Peter O'Toole. in February 2009 Madsen first became popular with audiences in 1986 with her portrayal of a Catholic school girl who fell in love with a boy from a prison camp in Duncan Gibbons' Fire with Fire. As beauty queen Dixie Lee Boxx, she was the love interest of minor league baseball manager Cecil "Stud" Cantrell in the HBO original film Long Gone. Also in the same year, she appeared in the music video for "I Found Someone", by Cher. She played Allison Rowe, a secretary in the comedy film Hot to Trot. She also starred as Helen Lyle in the horror film Candyman. Madsen appeared in a small role in the Francis Ford Coppola drama The Rainmaker alongside Matt Damon and Claire Danes. Film critic Roger Ebert said that Madsen had a "strong scene", while reviewer James Berardinelli noted that "the supporting cast is solid, with turns from... Virginia Madsen as a witness for the plaintiff". Madsen had a critically acclaimed performance as a supporting actress in Sideways, directed by Alexander Payne. Her role catapulted her onto the Hollywood A-list. Her first major role after Sideways was opposite Harrison Ford in Firewall. She later appeared in Robert Altman's A Prairie Home Companion, in a key role as the angel. She co-starred alongside Jim Carrey in The Number 23 and Billy Bob Thornton in The Astronaut Farmer; both films released in North America on February 23, 2007. She voiced Queen Hippolyte, mother ofWonder Woman, in the animated film Wonder Woman.
In 1988, Madsen appeared as Maddie Hayes' cousin in the fifth and final season of the ABC drama series Moonlighting. She has since made various television appearances, including ', ', Dawson's Creek, The Practice, Frasier, and other television series. She was also co-host of the long-running television series Unsolved Mysteries in 1999, during the show's eleventh season. She starred alongside Ray Liotta in the short-lived CBScrime drama series Smith. She also had a recurring role in the eighth and final season in the USA Network comedy-drama series Monk. In 2010, she landed the starring role of Cheryl West in the ABC comedy-drama series Scoundrels. In December 2010, it was announced that she would be joining the cast in the NBC science fiction series The Event. In 2012, she joined the cast of the AMC western drama series Hell on Wheels as Mrs. Hannah Durant, first appearing in episode eight of season 2, "The Lord's Day". In 2013, Madsen began appearing on Lifetime's Witches of East End as Penelope Gardiner, the main villainess of the first season. She starred as Congresswoman Kimble Hookstraten in the first season of the ABC political drama series Designated Survivor.
In 2008, she formed her own film production company called Title IX Productions. Her first project was a film made with her mother titled I Know a Woman Like That. The film is a documentary about the lives of older women. On the creation of the film, she said her mother's active lifestyle was an inspiration to start filming.
My mother's level of activity, of productivity, was exactly why I thought a project like this would work. Originally, when we put the idea together, she had said, "I'm far too busy. I'm going to Holland, and then I'm going here and there and I'm writing my book." But that's really what it's about.