In some internally-draining dryland basins, ephemeral river systems terminate at the margins of playas. Extreme floods can exert significant geomorphological impacts on the lower reaches of these river systems and the playas, including causing changes to flood extent, channel-floodplain morphology, and sediment dispersal. However, the characterization of these impacts using remote sensing approaches has been challenging owing to variable vegetation and cloud cover, as well as the commonly limited spatial and temporal resolution of data. Here, we use Sentinel-2 Multispectral Instrument (MSI) data to investigate the flood extent, flood patterns and channel-floodplain morphodynamics resulting from an extreme flood near the non-vegetated terminus of the Río Colorado, located at the margins of the world’s largest playa (Salar de Uyuni, Bolivia). Daily maximum precipitation frequency analysis based on a 42-year record of daily precipitation data (1976 through 2017) indicates that an approximately 40-year precipitation event (40.7 mm) occurred on 6 January 2017, and this was associated with an extreme flood. Sentinel-2 data acquired after this extreme flood were used to separate water bodies and land, first by using modified normalized difference water index (MNDWI), and then by subsequently applying independent component analysis (ICA) on the land section of the combined pre- and post-flood images to extract flooding areas. The area around the Río Colorado terminus system was classified into three categories: water bodies, wet land, and dry land. The results are in agreement with visual assessment, with an overall accuracy of 96% and Kappa of 0.9 for water-land classification and an overall accuracy of 83% and Kappa of 0.65 for dry land-wet land classification. The flood extent mapping revealed preferential overbank flow paths on the floodplain, which were closely related to geomorphological changes. Changes included the formation and enlargement of crevasse splays, channel avulsion, and the development of erosion cells (floodplain scour-transport-fill features). These changes were visualized by Sentinel-2 images along with WorldView satellite images. In particular, flooding enlarged existing crevasse splays and formed new ones, while channel avulsion occurred near the river’s terminus. Greater overbank flow on the floodplain led to rapid erosion cell development, with changes to channelized sections occurring as a result of adjustments in flow sources and intensity combined with the lack of vegetation on the fine-grained (predominantly silt, clay) sediments. This study has demonstrated how ICA can be implemented on Sentinel-2 imagery to characterize the impact of extreme floods on the lower Río Colorado, and the method has potential application in similar contexts in many other drylands.