Why does Lord Shiva has a Crescent Moon on His head?

Daksha's curse on Chandra is the reason. Along with this legend, some more explanations and attributes are presented below for their beauty, devotion and enlightment!

Lord Shiva's names based on this concept are Chandrachudan, Chandrakaladharan and Chandrasekaran.

1) Chandra and Somanatha:

Twenty-seven of Daksha’s daughters were married to the moon-god Chandra. One of these wives was named Rohini and Chandra loved Rohini more than he loved the other wives. The other wives felt neglected and they complained to their father. Daksha repeatedly warned his son-in-law to devote himself equally to all twenty-seven wives. But Chandra was in no mood to listen.

Daksha thereupon cursed Chandra that he would gradually fade away. Chandra didn’t know what to do. He went and sought advice from Brahma and Brahma told him that the only rescourse was to pray to Shiva. Chandra went to Prabhasa tirtha and made a linga on the banks of the river Sarasvati. He prayed to Shiva for six months.

At the end of the tapasya Shiva appeared before Chandra and offered to grant him a boon. Chandra explained what the problem was.

Well, said Shiva, Daksha’s curse cannot be entirely ignored. Let us have a compromise. During krishnapaksha you will wane. And during shuklapaksha (the bright part of the lunar fortnight) you will wax. That should satisfy everybody.

Thus being the graceful Almighty, Lord Shiva wore the moon crescent on His head, making him grow for 15 days and decay for 15 days periodically.

Chandra was delighted. The linga to which Chandra prayed is Somantha, the first of the jyotirlingas.

2) Soma and Rudra:

Crescent Moon: Shiva bears on his head the crescent of the moon. The epithet Chandraśekhara ("Having the moon as his crest" - chandra = Moon, śekhara = crest, crown) refers to this feature. The placement of the moon on his head as a standard iconographic feature dates to the period when Rudra rose to prominence and became the major deity Rudra-Shiva. The origin of this linkage may be due to the identification of the moon with Soma, and there is a hymn in the Rig Veda where Soma and Rudra are jointly emplored, and in later literature Soma and Rudra came to be identified with one another, as were Soma and the Moon.

3) Time Cycle:

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The crescent moon is shown on the side of the Lord's head as an ornament. The waxing and waning phenomenon of the moon symbolizes the time cycle through which creation evolves from the beginning to the end. Since the Lord is the Eternal Reality, He is beyond time. Thus, the crescent moon is only one of His ornaments.

The wearing of the crescent moon in His head indicates that He has controlled the mind perfectly at all times.