5-Methylcytosine (5mC) is an epigenetic modification involved in regulation of gene activity during differentiation. Tet dioxygenases oxidize 5mC to 5-hydroxymethylcytosine (5hmC), 5-formylcytosine (5fC), and 5-carboxylcytosine (5caC). Both 5fC and 5caC can be excised from DNA by thymine-DNA glycosylase (TDG) followed by regeneration of unmodified cytosine via the base excision repair pathway. Despite evidence that this mechanism is operative in embryonic stem cells, the role of TDG-dependent demethylation in differentiation and development is currently unclear. Here, we demonstrate that widespread oxidation of 5hmC to 5caC occurs in postimplantation mouse embryos. We show that 5fC and 5caC are transiently accumulated during lineage specification of neural stem cells (NSCs) in culture and in vivo. Moreover, 5caC is enriched at the cell-type-specific promoters during differentiation of NSCs, and TDG knockdown leads to increased 5fC/5caC levels in differentiating NSCs. Our data suggest that active demethylation contributes to epigenetic reprogramming determining lineage specification in embryonic brain. Display omitted •Widespread oxidation of 5hmC to 5caC occurs in ESCs and postimplantation embryos•5fC/5caC transiently accumulate during lineage specification of NSCs•5caC is enriched at promoters that are demethylated during NSC differentiation•TDG knockdown leads to an increase in 5fC/5caC in differentiating NSCs DNA methylation (5mC) is involved in regulation of gene activity during differentiation. Tet dioxygenases oxidize 5mC to 5-hydroxymethylcytosine (5hmC), 5-formylcytosine (5fC), and 5-carboxylcytosine (5caC). Though both 5fC and 5caC can serve as intermediates of active demethylation, the role of this pathway in differentiation is unclear. Wheldon et al. now show that 5fC/5caC transiently accumulate during lineage specification of neural stem cells. Their data suggest that active demethylation contributes to epigenetic reprogramming during differentiation of postmitotic cell types.