ABSTRACT Edible mushrooms are emerging as a rich source of bioactive peptides with diverse health‐promoting properties. This review comprehensively examined the structural characteristics, preparation methods, biological activities, and industrial applications of mushroom‐derived peptides. Bioactive peptides from edible mushrooms (EMPPs) were primarily prepared through enzymatic hydrolysis, microbial fermentation, or bioinformatics‐assisted virtual screening. The EMPPs exhibited potent antioxidant, antihypertensive, antibacterial, anti‐inflammatory, immunomodulatory, lipid‐lowering, anticancer, and bone health‐promoting activities. Mechanistic insights revealed their interactions with key signaling pathways and potential receptors as well as their ability to chelate metals, scavenge free radicals, and modulate gut microbiota. Industrially, mushroom peptides enhanced the nutritional and functional profiles of flour‐based products, meat substitutes, dairy items, and beverages by improving texture, antioxidant capacity, and glycemic response. Despite their potential, challenges persist in optimizing extraction techniques, validating in vivo efficacy, and scaling production. Future research should integrate advanced technologies and interdisciplinary approaches to unlock the full potential of mushroom peptides in functional foods and nutraceuticals, addressing global health challenges through sustainable solutions.