Mountain livelihoods heavily depend on watershed services. Watershed degradation significantly impacts both the environment and community livelihoods. Climate variability further exacerbates these challenges, reducing essential resources like freshwater, forest products, and agricultural productivity, thereby increasing community hardships and limiting adaptive capacity. Thus, there is an urgent need for community-preferred strategies based on community adaptive capacity and preferences to achieve sustainable watershed management. However, empirical, evidence-based adaptation strategies are often lacking. This study evaluated community preferences for adaptation strategies in the Khageri Khola Watershed, Nepal, using a choice experiment focused on adaptation capacity and willingness to participate. Primary data were gathered through in-depth, semi-structured stakeholder interviews (n = 16) and in-person household surveys (n = 440). Among the ten strategies assessed, five— ‘equipping local communities with technology and technology transfer,’ ‘implementing nature-based solutions,’ ‘establishing watershed-level multi-stakeholder institutions,’ ‘policy formulation based on existing practice and learning,’ and ‘empowering local individuals and organizations’—were statistically significant and preferred for adaptation. The results also indicated diverse preferences based on topographic and socio-demographic characteristics between upstream and downstream respondents, underscoring the need to acknowledge stakeholder diversity. The study developed three distinct watershed management scenarios tailored to decentralized policies and frameworks, offering a roadmap for policymakers and practitioners for fostering watershed adaptive management in agrarian regions like Nepal.