Blackman has impressed for the Blades since he moved from Aberdeen last summer, scoring 14 goals for the npower League One club.
Crystal Palace lodged a bid for the 23-year-old last week, but the lure of Barclays Premier League football means the striker has opted to join the Royals instead.
Blackman is reported to have cost the Royals ?1.2million.
The Bury-born striker spent three and a half years at Blackburn before moving to Scotland in 2011.
He is Reading's fourth signing of the January window, following Stephen Kelly, Daniel Caricco and Hope Akpan in to Brian McDermott's relegation-threatened squad.
"I'm really looking forward to it and I'm very excited," Blackman told Reading's official website. "I met the gaffer last night, he was fantastic with me and I couldn't have asked any more from him and Nicky Hammond. I can't wait to play - hopefully I can try and get involved as soon as possible."
"We're very pleased to get him," Reading boss McDermott said. "He had options elsewhere but he knows that we try to develop our players and get them better. He's played a lot of games, and has so much more to come.
"He can play in three or four positions - up front, either one of the wide areas and off the striker. I believe he can play off the striker, I spoke to him about that last night.
"He's another player that's hungry, wants to learn and wants to improve. His goalscoring record is getting better, better and better every year. He takes set plays, so he's a really good acquisition to the group."