It's when you take a massive dump over your towel. You wait for it to become dry and crusty so you can wipe it off the towel so you can sculpt it into a anime body pillow.

A small wash cloth or hand towel that is kept next to the bed, in the glove box or in a pocket and is used for cleaning up bodily fluids after a sexual encounter. It may have a smiley face drawn in a corner so that the Happy Towel will not be accidently used for other purposes. This towel might also be used for a woman to spit into if she does not have the decency to swallow.

Spending an hour or so online or watching TV fresh out of the shower, only wearing a towel. It is a very special time.

Masturbating in a hotel room. Named derives from when a man uses the smallest hotel towel available as a ejaculatory relief catch receptacle.

A shit streaked towel following an inadequate shower

The towel hanging in somebody's bathroom that has obviously been used. Since you don't know if they've used it to dry off after a bath, you have to assume it's touched their privates.

Originating in California for an awesome, often sudden, happening, often a climax. Terminology comes from common sexting images where the subject teases with a loosely arranged drying cloth before they 'drop the towel'.