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You can call someone toxic if they're agitated from you doing something wrong. It's become a defense mechanism that you can pull out if someone criticizes/critiques your gameplay. "tharja_bunny129 stop trying to be rambo" "Why do you have to be so toxic man? It's just a game."

I'm guessing that it became more popular terminology due to two reasons: First, it initially looks like it is less of an insult than "asshole." Often it's used as though someone toxic is literally poisonous and as such shouldn't be allowed to interact with anyone ever, whereas you might tolerate an asshole, so really it isn't any less of an insult. But at first glance it doesn't sound as bad, so you can get away with using it in more contexts. The second reason is related to this, in that it's a lot more vague what "toxic" means when compared to asshole. Someone could theoretically be toxic while not being unpleasant or being a mean person, due to creating a bad environment inadvertently or something. An asshole has to be a bit more active. Thus you can use "toxic" in many situations where you wouldn't get away with "asshole." At this point it's just been used so much that many people use it as a default without thinking about it.

If I had to guess it would be at the point that game companies started to care way too much with the image of their games and how the community reflects on that. The oldest game I can remember is League of Legends, where you can troll and be a complete asshole as long you dont insult anyone, if you do then they will send your ass to the shadow realm. A player is being a dick in a regular game = whatever, mute him and carry on. A player is being a dick in a game like Overwatch or LoL = OH MY GOD that could cost us new players! Here is a system that anyone can abuse to report people for something as little as swearing for slamming their toes on the table.