In The Matrix Online, the player assumes the role of a redpill, a human who was formerly trapped inside the Matrix and has since been freed and shown the truth of humanity's imprisonment. When creating a new character, the player is given the choice of taking a blue pill that will return them to their former life (quit the game) or a red pill, which will free their minds from the Matrix and allow them to take the body of a physical human and experience reality. Characters who are unaware of the fact that they are in the simulation are often referred to as "bluepills" because they have either taken the blue pill or have not been given the choice yet. People who are aware of the simulation (players) are referred to as "redpills" because they have taken the red pill (or, in very rare cases, when a character has self-substantiated out of the Matrix on their own). Following the choice between the two pills, the player is then taken through a basic tutorial of the game's mechanics, including mission interaction and the combat system. After the tutorial, they are then free to roam the Mega City (the large metropolis that the entire Matrix story is set in).

The story is centered around Alan's son Jethro ("Jet") Bradley. Since the film's events, ENCOM has been taken over by a company called Future Control Industries (fCon). After talking with his father who is kidnapped while on the phone with Jet, Jet is digitized by Ma3a, Alan's AI computer system, to aid her against Thorne, an executive from fCon improperly digitized into the computer who is now a virus throughout the system. Jet is mistakenly identified as the source of the corruption and captured by Kernel, the systems security control program.