Wasted is when a player is killed in a GTA game by losing all their health and armor.

Many things can contribute to this:

Drowning (in GTA: San Andreas and GTA: Vice City Stories you have a breath meter which has to run out to be wasted)
Damage from explosions
Damage from being shot*
Trapped in an exploding vehicle
Catching fire
Damage from beatings from pedestrians/police.
Damage from falling off a high point, failing to open parachute (San Andreas)
Running too fast on stairs, and therefore falling off, though this deals very little damage.
Being run over by a passing vehicle
Stumble down the steps while drunk (GTA IV)

(*) Armor protects against

Effect

As a result of being Wasted in GTA III you will lose all weapons and $100, the same as being Busted. In GTA IV your fined 10% of your money ($10,000 max) and keep your weapons. Any mission you were on will result in failure and will have to start over again.