The short answer
A dust output is a Bitcoin transaction output that is too small under a node's relay policy. Bitcoin Core compares the output's value with the estimated fee needed to spend that type of output later. If the value is below the calculated threshold, the output is called dust.
Dust is not a separate kind of bitcoin. It is an ordinary unspent transaction output, often called a UTXO. The label describes whether a node will normally accept and relay the transaction that creates it.
How Bitcoin Core calculates it
Bitcoin Core 31.1 uses a default dust relay fee of 3,000 satoshis per 1,000 virtual bytes. Its policy code combines the serialized size of an output with an estimated input size needed to spend it.
At that default setting, the code gives two useful examples:
- A typical legacy P2PKH output is dust below 546 sats.
- A typical SegWit P2WPKH output is dust below 294 sats.
The threshold is not one universal amount. It depends on the output script and on the
node's configured dustrelayfee. An unspendable OP_RETURN output has a threshold of zero
because it cannot become a future input.
Bitcoin Core's policy implementation documents the calculation. Its functional test checks that an output exactly at the threshold is accepted while one satoshi below it is rejected as dust.
Why wallets avoid it
A tiny UTXO can cost more in fees to spend than the value it carries. It also adds a future input to the wallet and, if it remains unspent, an entry to the UTXO set. Wallets therefore usually avoid creating change below the relevant threshold and add that remainder to the transaction fee instead.
If a wallet reports dust, check the recipient amount, the change amount and the output type. Do not assume that raising the fee will make a dust output acceptable. A higher fee can reduce change further. Reducing the payment fee, increasing the available input value or changing the transaction layout may be necessary.
The important limit
Dust rules are node policy, not a Bitcoin consensus rule. Node operators can change the configured threshold, and miners can include a consensus-valid transaction that ordinary nodes would not normally relay. The values above describe Bitcoin Core 31.1 at its default setting, not a permanent network-wide minimum.