Plain English Meaning
When a pilot is no longer able to fly the airplane safely because something is wrong with them physically or mentally. It can be sudden, like passing out, or gradual, like becoming confused or sluggish without realizing it.
Full Definition
A condition in which a pilot becomes partially or completely unable to perform required flight duties due to a sudden or gradual physical or mental impairment. Causes include illness, fatigue, hypoxia, dehydration, medication side effects, food poisoning, heart attack, stroke, or loss of consciousness. Incapacitation may be obvious (collapse, unresponsiveness) or subtle (confusion, slowed reactions, impaired judgment), and the subtle form is often the more dangerous because it can go unrecognized.