Ovechkin took to Twitter to announce the news.
The club's website says the five-year contract is worth $47.5 million.
Ovechkin has been playing for Washington since 2005, he could become an unrestricted free agent from 28 July.
In 2018, Ovechkin won the Stanley Cup for the first time with the Capitals. "Ovi" is the sixth-best sniper in the league's history with 730 goals and is just one goal behind fifth-ranked Marcel Dionne, with Wayne Gretzky in the lead (894).