On July 27, 1981, Walsh's mother, Revé, let Adam watch several older boys play video games at a Sears store in Hollywood, Florida, while she walked a few aisles away to shop for a lamp. When Revé returned to the video game section about seven minutes later, Adam and the other boys were gone. As the result of a squabble between the older boys, a security guard had been called and had told them to leave the store.The security guard asked the older boys if their parents were in the store, and the boys said that they were not. It was later conjectured by Adam's parents that he was too shy to speak to the security officer, who presumed that he was in the company of the other boys, and put him out the same door. Adam was then left alone near an exit of Sears that was unfamiliar to him.
 

Adam's severed head was found by two fishermen in a Vero Beach, Florida, canal on August 10, 1981. The rest of his body was not recovered. The coroner ruled that the cause of Adam's death was asphyxiation and that the decapitation had occurred later, perhaps to render his remains unidentifiable or the cause of his death indeterminable.

John Walsh himself was considered by authorities as a prime suspect as the police investigation started to become exhausted. After about a week, he was later absolved of any foul play following a highly emotional press statement that was televised nationally.

Police eventually concluded that Adam was abducted by a drifter named Ottis Toole near the front exterior of the Sears store that afternoon, after being asked to leave by a store clerk. Toole lured Adam into his Cadillac with promises of toys and candy, then proceeded to drive north on Interstate 95 toward his home in Jacksonville. Adam, at first docile and compliant, began to cry and scream as the drive wore on. Toole responded by knocking Adam out with blows to the head and chest (and likely strangled him), then pulled off onto a deserted service road in Indian River County to decapitate the boy. Toole later claimed to have disposed of Adam's body by incinerating it in an old refrigerator when he returned to Jacksonville. Since Toole was a cannibal, there were reports that he dismembered the young boy's body and consumed it, but those reports were later ruled out.

Toole repeatedly confessed and then retracted accounts of his involvement. Toole, allegedly a confidante of convicted serial killer Henry Lee Lucas, was never charged in the Walsh case, even though he provided seemingly accurate descriptions as to how he committed the crime. Several witnesses also place Toole in the Hollywood area in the days leading up to Walsh's disappearance. Police investigated Toole for the Walsh murder but lost important evidence in the case, including the bloodstained carpet from Toole's Cadillac. In September 1996, Toole died in prison, aged 49, of cirrhosis of the liver while serving a life sentence for other crimes. Afterwards, Toole's niece told John Walsh that her uncle made a deathbed confession to the murder of Adam. Toole's confession, however, had been viewed as reliable, since he and Henry Lucas confessed to or implicated themselves in more than 200 different homicides, most of which they accurately described details only the culprit would know.

In 1997, Hollywood Police Chief Rick Stone conducted an exhaustive review of the Adam Walsh case after the release of John Walsh's book. At the time, Stone was a 22-year veteran of the Dallas, Texas, and Wichita, Kansas, police departments and had been appointed Hollywood's chief of police in the previous year. Although the crime was decades old at the time of Chief Stone's review, he provided an analysis of the evidence, including reviewing taped interrogations of Ottis Toole by Hollywood Police Detective Mark Smith. Stone says his review found evidence to prove "beyond a reasonable doubt" that Toole murdered Adam Walsh. Both Toole and his close friend, convicted serial killer Henry Lee Lucas, were notorious, Stone noted, for confessing to crimes they committed and recanting.

In 2007, allegations earned widespread publicity that Jeffrey Dahmer, arrested in Wisconsin in 1991 after killing more than a dozen men and boys, was also named as a suspect in the Walsh murder. Dahmer was living in Miami Beach at the time Adam was murdered, and two eyewitnesses placed Dahmer at the shopping mall on the day Adam was abducted. One of the witnesses claimed to have seen a strange man walking into the Sears toy department where Adam was abducted. The other said that he saw a young, blond man with a protruding chin throw a struggling child into a blue van and speed off. Both witnesses recognized the man they had seen as Dahmer when pictures of him were released in the newspapers after his arrest. Reports showed that the delivery shop where Dahmer worked had a blue van at the time. Dahmer preyed on young men and boys (the youngest being eight years older than Adam), and his modus operandi included severing his victims' heads. After this rumor surfaced, John Walsh stated that he had "seen no evidence" linking his son's kidnapping and murder to Dahmer.

On December 16, 2008, the Hollywood, Florida, Police Chief Chad Wagner announced, with John Walsh present, that the case was now closed. An external review of the case had been conducted and police announced that they were satisfied that Ottis Toole was the murderer.

Adam's kidnapping and murder prompted John Walsh to become an advocate for victims rights. Adam Walsh's murder was among those that helped to spur the formation of the National Center for Missing and Exploited Children(NCMEC). As a result of his advocacy, he was approached to host the television program America's Most Wanted.

The Code Adam program for helping lost children in department stores is named in Walsh's memory. The U.S. Congress passed the Adam Walsh Child Protection and Safety Act on July 25, 2006, and President Bush signed it into law on July 27, 2006. The signing ceremony took place on the South Lawn of the White House, attended by John and Revé Walsh. The bill institutes a national database of convicted child molesters, and increases penalties for sexual and violent offenses against children. It also creates a RICO cause of action for child predators and those who conspire with them.