Arsenic contamination in groundwater poses serious health risks, as exemplified by the Blackfoot disease epidemic in Taiwan, which was caused by prolonged arsenic exposure. This study investigates the use of biochar derived from the wastewater treatment sludge of the Far Eastern Memorial Hospital (New Taipei City, Taiwan) as an efficient adsorbent for arsenic removal. A novel iron-doped sludge biochar (Fe-SBC) was developed to enhance arsenic adsorption efficiency, facilitate adsorbent recovery, and reduce operational costs. The adsorption mechanism of arsenic on Fe-SBC, modified with iron hydroxide complexes, was examined through Density Functional Theory (DFT) simulations. The results demonstrate a high arsenic removal efficiency of approximately 90% using continuous adsorption systems. The DFT calculations revealed strong chemical interactions between arsenic and the biochar, evidenced by high adsorption energy (−156.8 kJ mol−1) and a short bond distance (1.48 Å), correlating with the high adsorption performance observed experimentally. Additionally, arsenic byproducts desorbed from the adsorbent were repurposed into antibacterial agents and pigments. Four distinct pigment colors—green, blue, gray, and orange—were produced through different preparation methods, with the antibacterial agents showing effective antimicrobial properties. This study highlights the potential of Fe-SBC for sustainable arsenic remediation and resource recovery.