The practice or tradition of blessing a sneeze dates back to 77AD. The custom originally began as an actual blessing by Pope Gregory in 590AD. An outbreak of the bubonic plague was closing in on Rome and sneezing was thought to be an early symptom. Saying "God Bless You" was thought to be a common halt to the disease.
Another explanation behind saying "God Bless You" when someone sneezes, is that legend has it that your heart stops every time you sneeze. Saying "God Bless You" was supposed to ensure that you would continue living and your heart would continue beating.
Another legend explaining the phrase "God Bless You" was that people believed that your soul could be thrown from your body when you sneeze. It was believed that sneezing opened up your body to invasion by the devil or evil spirits. Another thought was that sneezing was the bodies' effort to force out invading evil spirits.
My grandma told me that people use to think that when you sneezed you sneezed some of your soul out or something like that so people would say "bless your soul" but now it's "bless you"--I don't know if any of that is true though my grandma is kinda insane haha