After successfully working as the mercenary Deadpool for two years, Wade Wilson fails to kill one of his targets on his anniversary with girlfriend Vanessa. That night, after the pair decide to start a family together, the target tracks Wilson down and kills Vanessa. Wilson kills the man in revenge, but blames himself for her death, and attempts to commit suicide six weeks later by blowing himself up. Wilson has a vision of Vanessa in the afterlife, but the pieces of his body remain alive and are put back together by Colossus.
Recovering at the X-Mansion, Wilson agrees to join the X-Men as a form of healing. He, Colossus, and Negasonic Teenage Warhead respond to a standoff between authorities and the unstable young mutant Russell Collins / Firefist at an orphanage, The Essex House for Mutant Rehabilitation, which is seen by society as a mutant re-education facility. Wilson realizes that Collins has been abused by the orphanage staff, and kills one of the staff members. Colossus stops him from killing anyone else, and both Wilson and Collins are arrested. Restrained with collars that negate their powers, they are taken to the "Icebox", an isolated prison for mutant criminals. Meanwhile, the cybernetic soldier Cable finds his family murdered by Collins in the future, and travels back in time to kill the boy before he ever becomes a murderer.
Cable breaks into the Icebox and attacks Collins. Wilson attempts to defend Collins, but is defeated by Cable who takes the Skee-Ball token that was a final memento of Vanessa. Wilson is able to force himself and Cable out of the prison, but not before Collins overhears Wilson deny that he cares for the young mutant. Near to death again, Wilson has another vision of Vanessa in which she convinces him to help Collins. Wilson organizes a team of mutants to break Collins out of a prison transfer convoy and defend him from Cable, whom he calls X-Force. The team launches their assault on the convoy by parachuting from a plane, but all of the team's members except for Wilson and the lucky Domino die in the landing. While the pair fight Cable, Collins frees fellow inmate Juggernaut who repays Collins by agreeing to help him kill the abusive headmaster. Juggernaut destroys the truck they are in and they escape.
Cable offers to work with Wilson and Domino to stop Collins's first kill, and agrees to give Wilson a chance to talk Collins down before attempting to kill the boy again. They arrive at the orphanage to be overpowered by Juggernaut while Collins attacks the headmaster. Colossus, who had at first refused to help Wilson due to his murderous ways, arrives and distracts Juggernaut long enough for Wilson and Cable to confront Collins. After Wilson appears to fail in talking down Collins, Cable shoots at the young mutant. Wilson leaps in front of the bullet and dies, reuniting with Vanessa in the afterlife. Seeing this sacrifice, Collins's future is changed and Cable's family now survives. Cable uses the last charge on his time-travelling device, which he needed for returning to his family in the future, to strap Vanessa's token in front of Wilson's heart before they arrive at the orphanage. This time, when Wilson leaps in front of the bullet it is stopped by the token and he survives. Collins still has his change of heart. The headmaster is run over by Wilson's taxi driver friend Dopinder, and Wilson accepts that he and his friends have formed their own strange family.
In a mid-credits sequence, Wilson has Negasonic Teenage Warhead and her girlfriend Yukio secretly repair Cable's time-traveling device to allow him to: save the lives of Vanessa and X-Force member Peter; visit the events of X-Men Origins: Wolverine on an alternate timeline and kill that film's version of Deadpool; and kill actor Ryan Reynolds while he is considering acting in the film Green Lantern.