Soulbound is the property of an item that prevents it from being traded or mailed to another character or sold in the Auction House.
Items usually become soulbound one of five ways:
Acquiring the item marked as “Bind on Pickup”. Items given as quest rewards are usually BoP. Looting an BoP item should give you a warning alert that this item will bind to you.
Equipping an item that is marked as “Bind on Equip”. You should get a warning alert that this item will bind to you. Most of the better equippable items bind on equip.
Using an item that is marked as “Bind on Use”.
Using certain enchants on a non-bound item.
Soulbinding is a game mechanism to prevent too much twinking from occurring. Higher-level characters cannot give their older equipment as hand-me-downs to their friends and guild mates.
Note that you can have soulbound items modified by other characters by putting the item in the bottom (“Will Not Be Traded”) spot of the trade window. You can have a blacksmith attach spurs to a soulbound boot, or an enchanter apply an enchantment to a soulbound item this way. The only way to dispose of one is to either sell it to vendor, hand it over as a quest objective, destroy it, use it as a spell/trade skill reagent, or disenchant it if you’re an enchanter.
The item can also become Account bound. It happens to items marked as Binds to account after being acquired by a player. Unlike soulbound items, they can be sent by mail to other characters of the same account and realm, including those of opposing faction (patch 3.3).