Oates will be making his head coaching debut in replacing Dale Hunter, who stepped down after this past season in which he took over as coach from Bruce Boudreau in November.
The Caps finished the regular season with a 42-32-8 mark and reached the Eastern Conference semi-finals, where they fell in seven games to the New York Rangers.
"Adam was a highly intelligent player in the NHL for 19 seasons. He has been an assistant coach in our conference for the past three seasons and is prepared to lead our club as head coach," general manager George McPhee said.
Oates, 49, becomes the 16th head coach of the Capitals after spending three seasons as an NHL assistant coach.
He became an assistant coach for the Tampa Bay Lightning during the 2009-10 season before moving to New Jersey in 2010. He was behind the bench as an assistant for the Devils' run to the Stanley Cup finals last season.
The former center played 19 seasons in the NHL from 1985-2004, appearing in 1,337 games and collecting 1,420 points (341 goals, 1,079 assists) with Detroit, St. Louis, Boston, Washington, Philadelphia, Anaheim and Edmonton.
Only Wayne Gretzky, Bobby Orr and Mario Lemieux averaged more assists per-game than Oates during their NHL careers.
Oates, a Weston, Ontario native, ranks sixth all-time in assists and 16th in points on the NHL scoring lists and was a five-time NHL All-Star.
Oates played in 387 games for the Capitals from 1996-2002, compiling 363 points (73 goals, 290 assists) and served as team captain from 1999-01.