Sonic & All-Stars Racing Transformed is the sequel to Sonic & SEGA All-Stars Racing. As in the original game, players race a lineup of SEGA characters along with a few outside guests on tracks inspired by SEGA games. In this sequel the vehicles can transform into three different types when driven through special gates: Kart form, Watercraft form, and Aircraft form, with different control styles for each. In addition, many of the tracks transform, changing routes and vehicle types as the race continues.

There are a variety of modes for both single and multiplayer experiences. Multiplayer options include online and local races. Multiple local players can also race in Time Trial or Grand Prix modes, or take on the World Tour for a lengthy challenge to unlock new characters as well as character mods. Racing as any particular character for an extended length of time earns that character experience points, which unlocks new vehicle mods allowing for enhanced performance when driving.

The World Tour offers a variety of race types, including standard, battle race, traffic attack, ring race, boost race, and pursuit modes. Progression in world tour is based on earning stars: the difficulty you select prior to an event represents the number of stars you'll earn if you win. The stars are used to open gates on the map as well as unlock new characters.