Teabagging can have various meanings.
Teabagging as a prank
As a prank, teabagging can refer to the repeated dunking of a person restrained inside a bag into water. This is a common boys' boarding school prank. It should be noted that this predates any known usage of the term below.
Teabagging can also refer to a man placing his testicles on another person or object as a practical joke. This is sometimes known as braining, after the appearance of the scrotum. Teabagging is inflicted on a sleeping or unconscious victim, and usually involves the man placing his testicles on the victim's face. Photographs are often taken of this pose as a part of the prank in order to further humiliate the victim.
Teabagging as a sexual practice
As a sexual practice, "teabagging" refers to a man dipping his testicles into the mouth of his partner as a form of oral sex. Sometimes teabagging is taken to specifically mean the act of a male stripper repeatedly tapping and grinding their testicles into someone's forehead.
Teabagging first entered pop culture in John Waters' cult film Pecker (as an act banned in a particular male strip club) and the term was more recently seen on the television series Sex and the City. It appeared again in the film Soul Plane included in a list of sexual acts and later defined. It also appears in America: The Book by the staff of The Daily Show and has been referenced on the television show by its host, Jon Stewart.
Teabagging in Halo
Teabagging made a recent show in the popular X-Box first person shooter Halo. It is likely that it orignated in other multiplayer shooters, but has seen increased popularity on X-Box Live, where players will add insult to the injury of their defeated foes. A player will stand over the head of a corpse and crouch repeatedly, simulating “teabagging” as described above, occasionally commenting over an X-Box Communicator Headset. This, however, is a brash move, exposing you to easy attack, increasing the risk and insult if you finish unharmed. Internet comic site VG Cats created a strip depicting the act.