Gaining

What does it mean?

I always thought it was someone that was thin but had no muscle tone at all.

That is my understanding as well. It can be someone with a BMI in the "Normal" range but is flabby with a belly and love handles .Maybe fluffy Jiggly arms.
It's not generally considered a derogatory term. I have been seeing in self-descriptive terms in articles for years.

In my mind think of someone who is skinny fat, as someone who has their whole body skinny except for their belly

It means some who looks normal but is clinically overweight ie. Vic. fat