Magical damage is similar to Physical Damage, except that it cannot be blocked by the target's Shielding, and it is not mitigated by the target's armor.
Magical damage is caused by spells, runes, wands and rods, or enchanted weapons.
The types of magical damage are Earth Damage, Fire Damage, Energy Damage, Ice Damage, Holy Damage and Death Damage.
Life Drain and Mana Drain may be considered magic damage since they are not affected by the target's shielding or armor, but it is currently impossible for players to cause this kind of damage.
Note that not all spells and runes cause Magical Damage, some of them cause Physical Damage instead. The only spells that cause physical damage (after Update 8.1) are the Explosion runes.