Exploration of the versatility of materials is very important for increasing the utilization of materials. Herein, we successfully prepared Bi4O5I2 powders via a facile solvothermal method. The Bi4O5I2 photocatalyst exhibited significantly higher photocatalytic activity as compared to the common BiOI photocatalyst in the degradation of methyl orange, methylene blue and rhodamine B under visible light irradiation. Especially, for the degradation of methyl orange, the photocatalytic activity of Bi4O5I2 is about 10 times that of BiOI. Moreover, Bi4O5I2 exhibits an extremely high second harmonic generation response of about 20 × KDP (the benchmark) estimated by the unbiased ab initio calculations. The coexisting multifunction of Bi4O5I2 is mainly because of the increased dipole moment due to the stereochemical activity of lone pairs that promotes separation and transfer of photogenerated carriers, then enhances the photocatalytic activity and results in a high second harmonic generation response. This indicates that Bi4O5I2 may have good potential applications in photocatalytic and nonlinear optical fields.