Carbon dots (CDs), a kind of carbon material discovered accidentally, exhibit unexpected advantages in fluorescence imaging/sensing such as photostability, biocompatibility, and low toxicity. For emerging theranostics, an interdiscipline created by integrating therapy and diagnostics, CDs are good candidates when they are combined with targeted chemo/gene/photodynamic/photothermal therapeutic moieties. Here, the development of CDs in nanomedicine is reviewed from their use as original imaging agents and/or drug carriers to multifunctional theranostic systems. Finally, the challenges and prospects of the next‐generation of CD‐based theranostics for clinical applications are also discussed. Carbon dots (CDs) in nanomedicine are gradually developed from original imaging agents and/or drug carriers to smart multifunctional theranostic systems. In addition to having the common advantages of stability, biocompatibility, and low toxicity, CDs with special photothermal therapy/ photodynamic therapy capability are successfully exploited. This work addresses recent encouraging progress in the development of CD‐based multifunctional nanomedicinal agents in theranostics.