A wide range of duties are entrusted to the Coast Guard. Among them are jurisdiction with sea and air patrols of Iceland's 200-mile exclusive economic zone and 12-mile territorial waters, and monitoring of fishing within the zone in consultation with the Marine Research Institute and Ministry of Fisheries. The Coast Guard is also responsible for rescue operations in this extensive sea area. All hydrographic surveys in Icelandic waters are undertaken by them, including the preparation of nautical charts. Coast Guard disposal squads are always called in to defuse bombs or depth charges which are washed ashore or entangled in the trawls of vessels fishing in Icelandic waters. They work in close cooperation with Iceland's Civil Defence Authority and Police Force.

For centuries, foreign fishermen operated off the shores of Iceland. This caused no problems as long as small vessels and primitive fishing gear were used, but with the advent of steamships and trawlers, overfishing became a serious threat. During the Danish dominion there was often dissatisfaction with the way the Danish Navy administered the then three-mile fishing zone, especially in the case of British trawlers, which often fished as close to land as they could reach.

On becoming an independent state in 1918, Iceland soon assumed control of its own Coast Guard operations. During the 1920s, Iceland acquired its first armed Coast Guard vessels, with a displacement of 200 tons and equipped with a 47-mm cannon.

The fishing grounds off Iceland were given a much-needed respite during the two world wars, but when peace was restored, foreign fishing began on a greater scale than ever before, using larger vessels and more sophisticated equipment. To counter unquestionable overfishing, Iceland extended its fishing zone to four nautical miles from a base line drawn across the outermost points of promontories and islands, thereby protecting large bays from this threat. The fisheries limit was subsequently extended to 12 miles in 1958, 50 miles in 1972 and 200 miles in 1975, increasing its area from 25,000 km2 during the pre-1952 period to 758,000 km2 in 1975, when Iceland's territorial waters were also extended to their present 12 miles.

The Icelandic Coast Guard was put to the test extensively during these successive extensions of the fishing limit. Strong protests were made by a number of nations, and one of them, the UK, sent warships to Iceland's fishing grounds in 1958, 1972 and 1975. The British frigates were equipped with sophisticated weapons and were several times larger than the Icelandic Coast Guard vessels, each with its single 57-mm gun. A number of fishing vessels which the Icelandic Coast Guard requisitioned for patrolling during the disputes were not armed at all. The "secret weapon" of the Icelandic Coast Guard, however, was the trawl cutters which were used on the trawl wires of foreign fishing vessels. Even though they were fishing under military protection and the Icelandic Coast Guard vessels were unable to arrest offenders, the foreign trawler skippers were in fact soon forced to give up after repeatedly losing their gear. The Icelandic Coast Guard vessels were frequently involved in hazardous collisions with both trawlers and frigates, but the three "Cod Wars" eventually came to an end with no loss of life.

Since the end of the Cod Wars, the Icelandic Coast Guard has been able to return to its regular duties, and has had no lack of business to attend to in such a large area of marine jurisdiction.