Maybe I am missing it, so my apologies.

I understand how the tags work, however, how to the prefixes work? I see nowhere to type in or select a pre-defined prefix.

Thanks in advance!

First, in your AdminCP, search for "prefix" and select [System] Can use prefixes?

Make sure prefixes are enabled:

Next, make sure you have prefixes enabled for the groups you wish to grant usage permissions to. It's under the "Content" tab of group settings.

Finally, make sure you have prefixes enabled in your forum (or other category) settings:

Once you do all of the above, you'll be prompted to use a defined tag as a prefix when creating a topic or other content item: