However, his participation in the antisemitic propaganda film Jud Süß and his collaboration with the Nazis made him a controversial figure.

After it became known that he worked as an extra at the Breslau Lobe-Theater, he was suspended from classes and decided to join a travelling theatre company.

By the agency of Alexander Moissi, in 1913 he met the theatre director Max Reinhardt, who took Krauss to his Deutsches Theater in Berlin.

However, Krauss initially only gained minor and secondary roles like King Claudius in Shakespeare's Hamlet or Mephistopheles in Goethe's Faust, wherefore after his military discharge as a midshipman of the Imperial German Navy in 1916 he also pursued a career as a film actor.

He again appeared on stage of the Deutsches Theater from 1926, as in Strindberg's A Dream Play filling five roles or as Wilhelm Voigt in the 1931 premiere of Carl Zuckmayer's The Captain of Köpenick.

[1][failed verification] His fellow actress Elisabeth Bergner called him "the greatest actor of all time" and a "demonic genius" in her memoirs.

While the Nazis seized power in Berlin in January 1933, Krauss joined the Vienna Burgtheater ensemble to perform as Napoleon in 100 Tage (Campo di maggio), a drama written by Giovacchino Forzano together with Benito Mussolini, whereafter he was received by the Italian dictator and also made the acquaintance of Nazi Propaganda Minister Joseph Goebbels.

In the course of the totalitarian Gleichschaltung process, Krauss was appointed Vice President of the Reichskulturkammer theatre department and served in that capacity from 1933 to 1935.

Krauss also played Shylock in Lothar Müthel's defamatory production of The Merchant of Venice staged at the Burgtheater in 1943.