A teensy bit in the future in a world not so different from the present, seventeen-year-old Iroha Sakayori is a stressed but diligent high school student living alone in Tokyo. Estranged from her mother and struggling to pay for her own tuition and living expenses, she is a workaholic on the verge of burnout, finding her only moments of peace in Tsukuyomi, a virtual reality cyberspace accessed by wearing contact lenses. Her refuge is following Yachiyo Runami, a popular AI idol and the administrator of Tsukuyomi. Walking home one night, Iroha sees a shooting star and makes a desperate wish for money. Moments later, electricity surges along power lines, and she discovers a glowing utility pole containing a baby girl. Reluctantly, she takes the infant home.

Over the next couple of days, the child rapidly ages into a boisterous teenager who claims to have come from the Moon because she found her life there unbearably boring. She reminds Iroha of the traditional Tale of the Bamboo Cutter, about a princess from the Moon who is forced to return to her celestial home. The girl adopts the name Kaguya but rejects the folktale's melancholy ending, insisting she will write her own happy ending. Despite their clashing personalities, with Iroha being pragmatic and grounded and Kaguya a manic pixie dream girl, they form an unlikely partnership. At Kaguya's fervent request, Iroha introduces her to Tsukuyomi, where her exuberant personality quickly gains a following. The pair enter the Yachiyo Cup, a streamer tournament where the winners get to perform with Yachiyo herself. Iroha acts as producer and songwriter while Kaguya is the on-screen talent.

During the competition, they face off against the top streaming group Black OnyX, led by Iroha's estranged brother. Though Black OnyX wins the actual battle game, Kaguya and Iroha win the cup due to a massive surge in popularity, earning their duet with Yachiyo. Just after the concert, however, Tsukuyomi is invaded by ominous avatars from the Moon, who demand Kaguya's return. They are repelled temporarily but set a date for her retrieval at the next full moon.

Kaguya explains that on the Moon, there is no sense of taste or temperature, and everyone simply repeats their assigned roles forever. She was the odd one, and she ran away to Earth to experience a life that is complex, fleeting, and free. As her departure date nears, Kaguya resigns herself to her fate and plans a farewell concert. Iroha, however, refuses to accept this, rallying her friends and even her brother to fight off the Moon's forces. They fail, and Kaguya is taken away.

Devastated, Iroha falls back into her old routines but eventually finds the strength to complete a song she had started with her late father. She arranges for it to be played to Kaguya on the Moon. After doing so, she has an epiphany and returns to Tsukuyomi to confront Yachiyo, realizing that the AI idol is actually Kaguya. Yachiyo confirms the truth. Hearing Iroha's song motivated Kaguya to return to Earth, but her spaceship struck a giant asteroid, sending her crashing onto the planet 8,000 years into the past. Stranded but sustained by her ship's technology, she watched civilization develop over millennia. When the internet was created, its structure mirrored the digital world of the Moon she knew, allowing her to upload her consciousness into Tsukuyomi without a physical body. She became Yachiyo, waiting through the ages for the day she would meet Iroha again.

Kaguya accepts that as she is now 8,000 years old, Iroha might not want her back. But Iroha does, changing her career plans from law to science. Ten years later, she successfully builds an android body, allowing Kaguya, still in her original youthful form, to upload her consciousness and finally live together with Iroha on Earth, having achieved the happy ending she always wanted.