The Legacy Award is given to sports figures who uses their platform to initiate change.
Kaepernick hasn't been affiliated with an NFL team this season, likely related to his stance of kneeling for the national anthem for much of the 2016 season.
NFL commissioner Roger Goodell has insisted on several occasions that the 30-year-old Kaepernick isn't being blackballed.
Regardless, Kaepernick's protest to draw attention to police brutality and social justice issues created change, and protests during the anthem picked up this season after players were criticized by President Donald Trump.
Kaepernick also has donated upwards of $1 million to charities.
"The Muhammad Ali Legacy Award is given to those who make the world a better place," Sports Illustrated executive editor Steve Cannella told USA TODAY Sports. "The fact Colin hasn't played this year or been on the field doesn't disqualify him.
"That fact that he hasn't played in a game actually shows what he has sacrificed for standing up for what he believes. There will never be another Muhammad Ali, but you can see the echoes of (Ali) in what Colin has done over the last 12 to 15 months."
Kaepernick filed a grievance against the NFL in October, claiming owners have colluded to keeping him out of the league.
Among the people who were part of the selection process was Lonnie Ali, the wife of the late boxing champion.
"I am proud to be able to present this year's SI Muhammad Ali Legacy Award to Colin Kaepernick for his passionate defense of social justice and civil rights for all people," Lonnie Ali said in a statement.
"Like Muhammad, Colin is a man who stands on his convictions with confidence and courage, undaunted by the personal sacrifices he has had to make to have his message heard. He has used his celebrity and philanthropy to benefit some of our most vulnerable community members."
In six NFL seasons, Kaepernick has passed for 12,271 yards with 72 touchdowns and 30 interceptions, adding another 2,300 yards and 13 touchdowns on the ground.
Kaepernick passed for 2,241 yards with 16 touchdowns and four interceptions while fumbling a career-worst seven times with the 49ers last season. He also ran for 468 yards and two touchdowns.
Kaepernick, who guided the 49ers to the Super Bowl following the 2012 season, had no takers last offseason while trying to land a job after opting out of his contract with San Francisco.