The Book of Thoth first appears in the First Tale of Setne Khamwas, a Demotic Egyptian story preserved on Papyrus Cairo 30646 in the Egyptian Museum, written in the Ptolemaic period around 100 BCE though set in the distant past. The hero of the tale is Setne Khamwas, a fictionalised version of Prince Khaemwaset, the fourth son of Ramesses II, who in real life was high priest of Ptah at Memphis and a passionate restorer of ancient monuments, and who after his death became the prototype of the Egyptian sage-magician. In the story, Setne is a learned scribe and magician who spends his days studying the ancient writings in the tombs and temples of Memphis, and who hears rumours of a book written by Thoth himself, the god of writing, wisdom, magic, and the moon, the divine scribe who invented hieroglyphs and who records the verdict when the hearts of the dead are weighed against the feather of truth in the Hall of Judgment.

The book is said to be hidden in the tomb of a prince named Naneferkaptah, who lived in the distant past and who paid a terrible price for possessing it. Setne searches the vast necropolis of Memphis with his foster-brother Inaros, finds the tomb, and enters it. Inside he sees the magic book, which radiates a strong light, and he tries to seize it. But the spirits of Naneferkaptah and his wife Ahwere rise up to defend their possession. Ahwere, though she and her son were buried at Coptos and not in this Memphite tomb, stands before Setne and tells him the story of how the book was found and what it cost.

Naneferkaptah, she explains, was her brother and the only son of Pharaoh Mernebptah. He had no occupation on earth but walking the desert of Memphis, reading the writings on the tombs of the pharaohs and the stelae of the scribes of the House of Life, the temple scriptorium where sacred texts were copied and stored. One day, during a procession in honour of Ptah, the creator god of Memphis, an old priest saw Naneferkaptah reading the inscriptions on the shrines and laughed at him. Naneferkaptah asked why, and the priest told him of a book that Thoth had written with his own hand when he came down following the other gods. Two spells were written in it. When the reader recited the first spell, he would charm the sky, the earth, the netherworld, the mountains, and the waters. He would discover what all the birds of the sky and all the reptiles were saying. He would see the fish of the deep, though there were twenty-one divine cubits of water over them. When he recited the second spell, he would see the sun god Ra appearing in the sky with his Ennead, and the Moon in its form of rising, whether he was in the netherworld or in his earthly form. This was knowledge that surpassed anything written on tomb walls or temple stelae, and Naneferkaptah was consumed with desire for it.

The priest told Naneferkaptah where the book was hidden: in the middle of the water of Coptos, in a box of iron. Inside the iron box was a box of copper. Inside the copper box was a box of juniper wood. Inside the juniper wood was a box of ivory and ebony. Inside the ivory and ebony was a box of silver, and inside the silver was a box of gold, and in that golden box was the book. Around the boxes were six miles of serpents, scorpions, and all kinds of reptiles, and around the golden box itself was an eternal serpent, a guardian that never slept. Naneferkaptah paid the priest a hundred pieces of silver and endowed him with two priestly stipends tax-free, and then he set out for Coptos with his wife Ahwere and their son Merib.

At Coptos, Naneferkaptah hired a boat and divers, and for three days they searched the river. On the third day, the divers found the iron box. Naneferkaptah opened the boxes one by one, fighting through the serpents and scorpions that guarded them, until he reached the golden box and the book inside. He took it back to the boat, and Ahwere read one spell from it. She charmed the sky, the earth, the netherworld, the mountains, and the waters. She discovered what all the birds and fish and beasts were saying. She read the second spell and saw Ra appearing in the sky with his Ennead, and the Moon rising, and all the stars in their forms. She saw the fish of the deep through twenty-one divine cubits of water. But Naneferkaptah, the better scribe, did something more. He had a sheet of new papyrus brought to him, wrote on it every word that was in the book, soaked it in beer, dissolved it in water, and drank it. In this way he made the book part of his own body, internalising its knowledge so that no one could take it from him.

Thoth discovered what had happened and reported it to Ra, the sun god and king of the gods. Ra judged that Naneferkaptah and every person belonging to him were forfeit. A divine power was sent from heaven, and six miles north of Coptos, at the place where the family had found the book, the boat was struck. Merib, the son, fell into the water and drowned. Ahwere, the wife, took her own life in grief. Naneferkaptah, unable to face his father the pharaoh with the news that he had killed his own family, bound the book to his body with a scarf of royal linen, fell into the water, and drowned. The boat sailed on to Memphis without him, and when it arrived, the people found Naneferkaptah clinging to the rudders through his magic, the book still on his body. He was buried with it, and his wife and son were brought from Coptos and laid to rest with him.

This is the story Ahwere tells Setne, and she ends with a warning: "You have no claim to it, whereas our lives on earth were taken on account of it." But Setne does not listen. He seizes the book, fights the ghost of Naneferkaptah in a magical duel, and carries the book out of the tomb. He unrolls it and reads from it to everyone, drunk with the power of having stolen a god's own writing. Then the punishment begins. Setne sees a beautiful woman named Tabubu, the daughter of the prophet of Bastet, and is consumed with lust for her. She leads him through a series of humiliations: he agrees to kill his own children for her, signs away his property, and is stripped naked before the pharaoh. Only then does he discover that the whole episode was an illusion created by Naneferkaptah's ghost, a demonstration of what happens to those who steal from the gods. Terrified, Setne returns the book to the tomb, finds the bodies of Ahwere and Merib at Coptos, and buries them with Naneferkaptah. The tomb is sealed, and the book remains where it belongs.

The Book of Thoth exists in another form as well, separate from the legendary magical book of the Setne tale. In the Ptolemaic and Roman periods, Egyptian priests composed a long Demotic text that scholars Richard Jasnow and Karl-Theodor Zauzich have called "The Ancient Egyptian Book of Thoth." Preserved on more than forty fragmentary papyri from collections in Berlin, Copenhagen, Florence, Paris, Vienna, and New Haven, this text is a dialogue between the god Thoth, called "He-who-praises-knowledge," and a mortal student called "He-who-loves-knowledge." It covers the scribal craft, sacred geography, the underworld, wisdom, prophecy, animal knowledge, and temple ritual, and it is remarkable for its possible connections to the classical Hermetic Corpus, the Greek writings attributed to Hermes Trismegistus, the Greek god identified with Thoth. In this text, Thoth is called "thrice-great," the same epithet applied to Hermes Trismegistus, and the dialogue form echoes both traditional Egyptian wisdom instructions and Greek philosophical works. The Christian Church Father Clement of Alexandria, writing in the 2nd century CE, claimed that Egyptian priests possessed forty-two books written by Hermes that contained "the whole philosophy of the Egyptians," covering hymns, rituals, temple construction, astrology, geography, and medicine. Whether Clement knew of the Setne tale or the Demotic Book of Thoth, or whether he was drawing on a separate tradition of Thoth's sacred library, the number forty-two - one for each nome or province of Egypt - suggests a comprehensive divine encyclopaedia, the sum of all knowledge compressed into a single canon.