William Edward Crystal was born at Doctors Hospital on the Upper East Side of Manhattan, and initially raised in the Bronx. As a toddler, he moved with his family to 549 East Park Avenue in Long Beach, New York, on Long Island. Crystal and his older brothers Joel, who later became an art teacher, and Richard, nicknamed Rip, were the sons of Helen (née Gabler), a housewife, and Jack Crystal, who owned and operated the Commodore Music Store, founded by Crystal's grandfather, Julius Gabler. Crystal's father was also a jazz promoter, a producer, and an executive for an affiliated jazz record label, Commodore Records, founded by Crystal's uncle, musician and songwriter Milt Gabler.
Crystal is Jewish (his ancestors emigrated from Austria, Russia, and Lithuania), and he grew up attending Temple Emanu-El (Long Beach, New York) where he had his bar mitzvah. The three young brothers would entertain by reprising comedy routines from the likes of Bob Newhart, Rich Little and Sid Caesar records their father would bring home. Jazz artists such as Arvell Shaw, Pee Wee Russell, Eddie Condon, and Billie Holiday were often guests in the home. With the decline of Dixieland jazz and the rise of discount record stores, in 1963, Crystal's father lost his business and died later that year at the age of 54 after having a heart attack. His mother died in 2001.
After graduating from Long Beach High School in 1965, Crystal attended Marshall University in Huntington, West Virginia, on a baseball scholarship. Crystal never played baseball at Marshall because the program was suspended during his first year. Crystal did not return to Marshall as a sophomore, instead deciding to stay in New York to be close to his future wife. He studied acting at HB Studio. Crystal attended Nassau Community College with her and later transferred to New York University, where he was a film and television directing major. Crystal graduated from NYU in 1970 with a BFA from its then School of Fine Arts. One of his instructors was Martin Scorsese, while Oliver Stone and Christopher Guest were among his classmates.
