The announcement puts to end months of speculation about Trump and Kelly's relationship amid a planned shakeup in the Cabinet.
"John Kelly will be leaving toward the end of the year," the president said after walking outside his residence to address reporters gathered on the South Lawn.
Trump described Kelly as "a great guy," but said he wouldn't describe his departure as a retirement.
He said he'd announce Kelly's replacement in the next two days. Kelly was sworn in as chief of staff in July 2017, replacing Reince Priebus. Prior to that, Kelly served as secretary of the Department of Homeland Security.
Kelly, a former military commander, had a reputation for bringing discipline to the West Wing and a president known for operating on impulse. Within months of Kelly's appointment, there were rumors of friction between the two men.
His departure puts Homeland Security Secretary Kirstjen Nielsen's status into question. She joined the Cabinet in December 2017 after serving as Kelly's chief of staff in DHS. She moved with him to the White House when he took on his new role in July 2017.
In November, Trump told Fox News Sunday he was thinking about changes to "three or four or five positions." He spoke of Nielsen and Kelly specifically.
"I like [Nielsen] very much I respect her very much I'd like her to be much together on the border. Much tougher. Period," Trump said.