The Portugal international adds further depth to Jurgen Klopp's attack, although he is set be a back-up for Mohamed Salah, Sadio Mane and Roberto Firmino.
Jota arrives at Anfield after three seasons at Wolves, the club he joined, initially on loan, from Atletico Madrid in 2017.
"It's just a really exciting moment for me and my family," Jota told Liverpool's official website.
"All of my path since I was a kid and now, to join a club like Liverpool - the world champions - is just unbelievable. I just want to get started.
"It is one of the best teams in the world - the best at the moment because they are world champions. When you look at the Premier League, you always see Liverpool as one of the biggest teams in the country, so it's impossible to say no."
Jota – signed permanently by Wolves in 2018 – scored 16 goals in 48 games in all competitions in 2019-20, including seven in 34 in the Premier League.
He joins Thiago and Kostas Tsimikas as new arrivals at Liverpool for the 2020-21 season.
Meanwhile, Ki-Jana Hoever has moved in the opposite direction, the 18-year-old defender joining Wolves for a reported £10m fee.