Wallace roared home in 4 minutes 11.28 seconds to pip Australia's Thomas Fraser-Holmes into second, while South African Sebastien Rousseau was third.
The Edinburgh swimmer produced a thrilling finish to secure Scotland's third swimming gold of the Games.
Fraser-Holmes had earlier taken Robbie Renwick's 200m freestyle title.
Twenty-one-year-old Wallace, a student at the University of Florida, produced an impressive closing 50 metres to earn the gold and deny Fraser-Holmes his second of the day.
Daniel Wallace sparked wild celebrations at Tollcross Wallace's compatriot Michael Jamieson endured contrasting emotions in the pool.
Jamieson is out of the running for a medal in the 100m breaststroke after finishing fifth in his semi-final.
Ross Murdoch, who won gold in the 200m breaststroke, eased home in 59.72 seconds with compatriot Craig Benson third.
Jamieson could only manage 1:02.04 and will miss Saturday's final.
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