Water-in-oil (W/O) nanoemulsion can be an alternative working fluid to kerosene in sinking electrical discharge machining (EDM). W/O nanoemulsion can improve the material removal rate, reduce the relative electrode wear rate, and alleviate the pollution of conventional sinking EDM using kerosene. However, the mechanism of sinking EDM using W/O nanoemulsion is not fully understood. In this study, a set of comparative experiments of single-pulse discharge is conducted in W/O nanoemulsion and kerosene to clarify the discharge mechanism of W/O nanoemulsion. The main machining parameters, which are crucial in actual sinking EDM, including pulse duration, peak current, and electrode polarity, are investigated. Precise geometries of the corresponding craters generated at the critical discharge gap are determined by the combination of optical instruments and 3D-rebuilt method. The effect of the working fluid flushing on the discharge machining is also analyzed. The results demonstrate that by the introduction of nanodroplets, the critical discharge gap is enlarged in W/O nanoemulsion. Compared with kerosene, W/O nanoemulsion has higher viscosity and density, which leads to stronger restrictions to the plasma channel and the motions of bubbles; therefore, larger volumes of melted materials and craters are formed in W/O nanoemulsion. This difference between W/O nanoemulsion and kerosene rises with the increasing discharge energy. Moreover, the restriction effect from working fluid is insignificant in the case of negative electrode polarity.