Iceland has 1 festival in this guide, spread across 1 city. They run in November, and festival-day temperatures range from 4°C (39°F) to 4°C (39°F), with nights down to -1°C (30°F). That range is the reason there is no single "Iceland festival outfit". The answer changes by month and by site.
1 sits below 16°C, where the outer layer effectively is the outfit. 1 carries a high rain risk, which makes waterproof footwear a requirement rather than a precaution.
The ground matters as much as the sky. Every festival here is on city streets, which puts broken-in trainers or a low boot at the top of the list for most of these events. None of them have camping on site, so you are travelling in and out each day and the outfit has to survive the journey at both ends.
Stylistically the crowd here leans indie, alt, gorp and elegant. Iceland Airwaves is the largest of them at around 10,000 people, and it sets the tone the smaller ones react to. None of that is a dress code. It is what you will see, which is worth knowing if you would rather blend in or deliberately not.