BACKGROUND: Limited prospective outcome data exist regarding transgender and nonbinary youth receiving gender-affirming hormones (GAH; testosterone or estradiol). METHODS: We characterized the longitudinal course of psychosocial functioning during the 2 years after GAH initiation in a prospective cohort of transgender and nonbinary youth in the United States. Participants were enrolled in a four-site prospective, observational study of physical and psychosocial outcomes. Participants completed the Transgender Congruence Scale, the Beck Depression Inventory-II, the Revised Childrens Manifest Anxiety Scale (Second Edition), and the Positive Affect and Life Satisfaction measures from the NIH (National Institutes of Health) Toolbox Emotion Battery at baseline and at 6, 12, 18, and 24 months after GAH initiation. We used latent growth curve modeling to examine individual trajectories of appearance congruence, depression, anxiety, positive affect, and life satisfaction over a period of 2 years. We also examined how initial levels of and rates of change in appearance congruence correlated with those of each psychosocial outcome. RESULTS: A total of 315 transgender and nonbinary participants 12 to 20 years of age (mean [±SD], 16±1.9) were enrolled in the study. A total of 190 participants (60.3%) were transmasculine (i.e., persons designated female at birth who identify along the masculine spectrum), 185 (58.7%) were non-Latinx or non-Latine White, and 25 (7.9%) had received previous pubertal suppression treatment. During the study period, appearance congruence, positive affect, and life satisfaction increased, and depression and anxiety symptoms decreased. Increases in appearance congruence were associated with concurrent increases in positive affect and life satisfaction and decreases in depression and anxiety symptoms. The most common adverse event was suicidal ideation (in 11 participants [3.5%]); death by suicide occurred in 2 participants. CONCLUSIONS: In this 2-year study involving transgender and nonbinary youth, GAH improved appearance congruence and psychosocial functioning. (Funded by the Eunice Kennedy Shriver National Institute of Child Health and Human Development.).