Description

Each step in a pipeline runs in parallel.

In this case, grep foo file.txt will immediately try to read file.txt while sed .. > file.txt will immediately try to truncate it.

This is a race condition, and results in the file being partially or (far more likely) entirely truncated.

Example of incorrect code:

grep foo file.txt | sed -e 's/foo/bar/g' > file.txt

Example of correct code:

grep foo file.txt  | sed -e 's/foo/bar/g' > tmpfile && mv tmpfile file.txt

Exceptions

You can ignore this error if:

The file is a device or named pipe. These files don't truncate in the same way.
The command mentions the filename but doesn't read/write it, such as echo log.txt > log.txt.