The invention provides water-soluble rubber and a preparation method thereof. The water-soluble rubber is mainly prepared from the following components in parts by weight: 35 to 55 parts of acrylamidemodified polyurethane, 20 to 30 parts of carboxymethyl chitosan, 5 to 40 parts of a compatibilizer, 0.3 to 2 parts of a coupling agent, 0.1 to 1 part of an antioxidant, 1 to 5 parts of a softening agent, 0.3 to 3 parts of a crosslinking agent, 0.3 to 3 parts of an accelerant and 0.5 to 6 parts of sulfur. The water-soluble rubber provided by the invention has certain rubber elasticity and strengthand good dissolving performance; the dissolving time and the strength retention rate are controlled through controlling a proportion of materials; the water-soluble rubber is dissolved in water to provide customized products for customers in fields including military industry and petroleum; the water-soluble rubber has relatively high economic value and social value.