Prior to the test, SpaceX chief executive Elon Musk had predicted there was only a one in three chance of the launch and landing succeeding.
Despite the failure, the test flight marks a major milestone towards sending humans to Mars.
The prototype spacecraft appeared close to achieving the landing and was also able to fulfil several other key objectives during the first ever flight test of its kind.
“Successful ascent, switchover to header tanks & precise flap control to landing point,” Mr Musk tweeted.
The Starship SN8 failed a similar attempt of the 12.5 km sub-orbital flight on Tuesday with just 1.3 seconds to go until liftoff. The next Starship prototype, SN9, is already built and is expected to attempt a similar flight test at some point in the near future from SpaceX’s Boca Chica facility in Texas.
Speaking last week at an event in Germany, Mr Musk said he hoped to send the first humans to Mars aboard a Starship craft in 2024.
The serially delayed launch finally took place at 1645 local time [2245 GMT], with just 15 minutes until the day’s launch window closed.
Around two minutes after lift-off, the base of the craft appeared to catch on fire, though this soon went out.
After reaching its target altitude, Starship SN8 then attempted to perform a complicated flip landing manoeuvre, whereby it essentially belly flops to Earth.
Soon after launching, and before the crash landing, Mr Musk tweeted enthusiastically about the test.
It appeared to lose control, as it was not at the intended 60-degree angle.
However, the craft soon righted itself and almost managed to land without incident.
But as it touched down, Starship SN8 crumpled into a ball of fire.
"SN8’s flight test is an exciting next step in the development of a fully reusable transportation system capable of carrying both crew and cargo to Earth orbit, the Moon, Mars, and beyond. As we venture into new territory, we continue to appreciate all of the support and encouragement we have received," SpaceX said in a statement prior to the test.