The Whites' official statement described the fee as undisclosed, though the Daily Mail reports the deal is worth £700,000, with a 20 per cent sell-on clause included.
Stephenson becomes Wanderers' fourth summer signing, agreeing a four-year contract at the Toughsheet Community Stadium.
Blackburn Rovers had also shown interest in the 22-year-old, but he travelled for a medical on Wednesday ahead of agreeing terms with Bolton.
Stephenson has also played in more advanced roles as a wing-back and in midfield during his career, and ends a near eight-year stay at Liverpool to make Bolton his new home.
"I've spoken a lot in the past couple of years about wanting to find a permanent home.
"I didn't mind where it was but to be at such a big club like Bolton, I think literally the minute I spoke to Fergal a couple of months ago now, it was the only place I really wanted to come.
"You know, the size of the club, the facilities here, the stadium, unbelievable. I came to a couple of games at the end of last year and watched the game against Bradford here in the play-offs.
"Just to see the atmosphere in the stadium, it makes you think, you know, I want a piece of that."
Former Sunderland youngster Stephenson joined Liverpool from his hometown club at Under-15 level and progressed through the academy ranks on Merseyside.
He did not make a competitive first-team appearance for Liverpool, but featured on pre-season tours, captained the club's Under-18s side and played in Premier League 2 for the Under-21s.
He gained senior experience on loan in League Two at Barrow before two season-long spells at Dundee United, the second of which followed a new contract at Liverpool.
Stephenson helped Dundee United finish fourth in the Scottish Premiership in 2024/25 to qualify for European football, and was named the club's young player of the year.
He made a further 29 starts in the Scottish top flight in his second loan season, scoring five times and at times captaining the side, as Dundee United finished seventh in 2025/26.
He arrives at Bolton with 105 senior appearances on his CV.
"It's brilliant being a Liverpool player and they've given me a lot and taught me a lot, but there's nothing like playing men's football.
"You can't replicate that at Liverpool playing for the 21s. I found that I wasn't going to get the chance to play for the first team every week, and that's why I made the decision to come here."
Stephenson follows defenders Akin Famewo and Ben Davies and attacking midfielder David Watson in joining Bolton following last season's promotion.
He will link up with his new teammates when they return to pre-season training next Monday.