Cytosine methylation is the major epigenetic modification of metazoan DNA. Although there is strong evidence that active DNA demethylation occurs in animal cells, the molecular details of this process are unknown. The recent discovery of the TET protein family (TET1-3) 5-methylcytosine hydroxylases has provided a new entry point to reveal the identity of the long-sought DNA demethylase. Here, we review the recent progress in understanding the function of TET proteins and 5-hydroxymethylcytosine (5hmC) through various biochemical and genomic approaches, the current evidence for a role of 5hmC as an early intermediate in active DNA demethylation and the potential functions of TET proteins and 5hmC beyond active DNA demethylation. We also discuss how future studies can extend our knowledge of this novel epigenetic modification.