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Identity has been empirically established as a recovery process from serious mental illness (SMI) yet is often overlooked within intervention evaluations. Community arts presents one such intervention with emerging evidence illustrating the potential for recovery to occur within this context. However, research indicates numerous mechanisms may be involved in the identity recovery process, making it difficult to determine what works, for whom and in what context. The current review aimed to generate new theories to explain how, why and in what context community arts enable the identity change recovery process for individuals with SMI. A realist review was conducted between January and September 2021, with 22 articles and reports reviewed and synthesised to develop a theory. A safe and empowering intervention context was found to be vital to activate three key mechanism pathways: (a) feeling in control of SMI through coping; (b) achieving acceptance through connectedness and (c) overcoming personal challenges. The outcome was the development of positive self‐awareness, which enables individuals to redefine identity beyond SMI through both social and personal identities. Novel insights are presented through theory development, utilising the Social Identity Approach to Health and Transformative Learning Theory to conceptualise the findings through a multi‐theoretical lens. Please refer to the Supplementary Material section to find this article's Community and Social Impact Statement. [ABSTRACT FROM AUTHOR]