Mushroom Grass Seeds are a farming item that can be planted to grow Glowing Mushrooms, just like Grass Seeds can be planted to grow Regular Mushrooms, though the glowing grass grows much, much slower than regular grass. If mushroom grass is hit with a pickaxe one block of the purple grass will disappear.
The Mushroom Grass Seeds are found from the tall mushroom trees at a fairly uncommon rate, although they can be found from harvesting the grown Mushrooms. Once a seed is placed on a mud block it can spread to other Mud blocks touching them at a very slow rate.
To grow a farm from Mushroom Grass Seeds you will need to plant them only on mud, with more mud connecting so it can expand.
Mushroom Grass Seeds can be placed above ground but they will only spread when below surface level, you can check this with a Depth Meter.