Well, magic, of course.
Just kidding. First, check out this video on how to easily make Magic Sand at home:

To make sand "magical," you're really making it super hydrophobic or "water fearing." The sand particles repel water so well that it doesn't absorb any as it is submerged under water. If you use dark colored sand, it actually appears to be somewhat silvery. This silvery, reflective look is actually caused by a bubble that is trapped within the underwater magic sand. This proves that magic sand doesn't actually get wet - or as wet as you might think. That's why/how when you take it out, it's dry.