Announcing the move, Home Affairs Minister Peter Dutton described Prakash as "a very dangerous individual" who is believed to be a recruiter for IS group also encouraged terrorist plots in Australia.
The 27-year-old also known as Abu Khaled al-Cambodi is currently being held in Turkey on terror related charges.
In July, a Turkish court ruled against extraditing him to face charges in his home country Australia where he is wanted on charges of being member of a terrorist organisation as well as supporting and promoting IS.
In a televised news conference, Dutton said Prakash had been central to IS's efforts in the Middle East.
"If given the opportunity Prakash would harm or kill Australians and our country is a safer place for him having lost his Australian citizenship," he said.
In 2016, the Australian government described Prakash as "the principal Australian reaching back from the Middle East" into networks in Melbourne and Sydney.
In a court appearance in Turkey in 2017, Prakash admitted he had "something to do" with terrorist plots in Australia but said he was "not 100% responsible".
He said he had been forced to make IS propaganda videos and that he had fled the group after seeing its "true face".
Prakash, who also hold Fijian citizenship, left Australia for Syria in 2013, taking the name Abu Khaled al-Cambodi. He was mistakenly reported to have been killed in a US air strike in Mosul, Iraq, in 2015.