diff --git a/demo/index.html b/demo/index.html
index e4db4118..29b6fcf0 100644
--- a/demo/index.html
+++ b/demo/index.html
@@ -26,6 +26,9 @@
           <p>
             <label><input type="checkbox" id="option-mac-option-is-meta"> macOptionIsMeta</label>
           </p>
+          <p>
+            <label><input type="checkbox" id="option-transparency"> transparency</label>
+          </p>
           <p>
             <label>
               cursorStyle
diff --git a/demo/main.js b/demo/main.js
index f7c863f5..682fc5a0 100644
--- a/demo/main.js
+++ b/demo/main.js
@@ -31,6 +31,7 @@ var terminalContainer = document.getElementById('terminal-container'),
       cursorStyle: document.querySelector('#option-cursor-style'),
       macOptionIsMeta: document.querySelector('#option-mac-option-is-meta'),
       scrollback: document.querySelector('#option-scrollback'),
+      transparency: document.querySelector('#option-transparency'),
       tabstopwidth: document.querySelector('#option-tabstopwidth'),
       experimentalCharAtlas: document.querySelector('#option-experimental-char-atlas'),
       bellStyle: document.querySelector('#option-bell-style'),
@@ -75,15 +76,20 @@ actionElements.findPrevious.addEventListener('keypress', function (e) {
 optionElements.cursorBlink.addEventListener('change', function () {
   term.setOption('cursorBlink', optionElements.cursorBlink.checked);
 });
+optionElements.macOptionIsMeta.addEventListener('change', function () {
+  term.setOption('macOptionIsMeta', optionElements.macOptionIsMeta.checked);
+});
+optionElements.transparency.addEventListener('change', function () {
+  var checked = optionElements.transparency.checked;
+  term.setOption('allowTransparency', checked);
+  term.setOption('theme', checked ? {background: 'rgba(0, 0, 0, .5)'} : {});
+});
 optionElements.cursorStyle.addEventListener('change', function () {
   term.setOption('cursorStyle', optionElements.cursorStyle.value);
 });
 optionElements.bellStyle.addEventListener('change', function () {
   term.setOption('bellStyle', optionElements.bellStyle.value);
 });
-optionElements.macOptionIsMeta.addEventListener('change', function () {
-  term.setOption('macOptionIsMeta', optionElements.macOptionIsMeta.checked);
-});
 optionElements.scrollback.addEventListener('change', function () {
   term.setOption('scrollback', parseInt(optionElements.scrollback.value, 10));
 });
diff --git a/src/renderer/Renderer.ts b/src/renderer/Renderer.ts
index 9404a461..c41dece5 100644
--- a/src/renderer/Renderer.ts
+++ b/src/renderer/Renderer.ts
@@ -150,6 +150,7 @@ export class Renderer extends EventEmitter implements IRenderer {
   }
 
   public onOptionsChanged(): void {
+    this.colorManager.allowTransparency = this._terminal.options.allowTransparency;
     this._runOperation(l => l.onOptionsChanged(this._terminal));
   }
 
diff --git a/src/renderer/atlas/DynamicCharAtlas.ts b/src/renderer/atlas/DynamicCharAtlas.ts
index 25dbca18..f388bf65 100644
--- a/src/renderer/atlas/DynamicCharAtlas.ts
+++ b/src/renderer/atlas/DynamicCharAtlas.ts
@@ -14,6 +14,11 @@ import LRUMap from './LRUMap';
 const TEXTURE_WIDTH = 1024;
 const TEXTURE_HEIGHT = 1024;
 
+const TRANSPARENT_COLOR = {
+  css: 'rgba(0, 0, 0, 0)',
+  rgba: 0,
+}
+
 interface IGlyphCacheValue {
   index: number;
   isEmpty: boolean;
@@ -137,7 +142,6 @@ export default class DynamicCharAtlas extends BaseCharAtlas {
   // into a shared function.
   private _drawToCache(glyph: IGlyphIdentifier, index: number): IGlyphCacheValue {
     this._tmpCtx.save();
-    // no need to clear _tmpCtx, since we're going to draw a fully opaque background
 
     // draw the background
     let backgroundColor = this._config.colors.background;
@@ -146,8 +150,25 @@ export default class DynamicCharAtlas extends BaseCharAtlas {
     } else if (glyph.bg < 256) {
       backgroundColor = this._config.colors.ansi[glyph.bg];
     }
+
+    let backgroundIsTransparent = false;
+    if ((backgroundColor.rgba & 0xFF) !== 0xFF) {
+      // The background color has some transparency, so we need to render it as fully transparent
+      // in the atlas. Otherwise we'd end up drawing the transparent background twice around the
+      // anti-aliased edges of the glyph, and it would look too dark.
+      //
+      // This has the side-effect of disabling RGB subpixel antialiasing, but most compositors will
+      // disable that anyways on a partially transparent background for similar reasons.
+      backgroundColor = TRANSPARENT_COLOR;
+      backgroundIsTransparent = true;
+    }
+
+    // Use a 'copy' composite operation to clear any existing glyph out of _tmpCtx, regardless of
+    // transparency in backgroundColor
+    this._tmpCtx.globalCompositeOperation = 'copy';
     this._tmpCtx.fillStyle = backgroundColor.css;
     this._tmpCtx.fillRect(0, 0, this._config.scaledCharWidth, this._config.scaledCharHeight);
+    this._tmpCtx.globalCompositeOperation = 'source-over';
 
     // draw the foreground/glyph
     this._tmpCtx.font =
@@ -179,7 +200,10 @@ export default class DynamicCharAtlas extends BaseCharAtlas {
     const imageData = this._tmpCtx.getImageData(
       0, 0, this._config.scaledCharWidth, this._config.scaledCharHeight,
     );
-    const isEmpty = clearColor(imageData, backgroundColor);
+    let isEmpty = false;
+    if (!backgroundIsTransparent) {
+      isEmpty = clearColor(imageData, backgroundColor);
+    }
 
     // copy the data from _tmpCanvas to _cacheCanvas
     const [x, y] = this._toCoordinates(index);