Cotton serves as a critical natural raw material in the textile industry, and it also generates significant amounts of cotton waste annually. Due to its inherent suitability, increasing attention has been directed toward recovering cellulose from waste textiles and repurposing it for diverse applications, particularly in the production of regenerated cellulose fibers. Concurrently, recent advancements have led to the development of various modification techniques for cotton-based fibers and fabrics, enabling their application in functional fibers and smart textiles beyond conventional uses. However, the lack of comprehensive knowledge in this field hinders the effective valorization of cotton waste and the further advancement of cotton-based textiles. This review systematically summarizes current progress in cotton cellulose recovery and emerging trends in upgrading cotton for functional fiber and smart textile applications, while also addressing key challenges and future directions. The findings presented herein will serve as a valuable reference for cotton waste valorization and the fabrication of smart cotton textiles, offering valuable insights to guide future developments in the cotton industry.