Back when traveling by boat was the main way to travel long distances, ships would fly flags with certain colors and designs that symbolized your intentions or what you were doing. There were flags for if you were arriving or leaving a port, for example.
Of course, this was often exploited. Pirates especially loved showing the wrong flag to get close to unsuspecting ships and only show their “true colors” when they were close enough to attack the ship.
Pirates weren’t the only ones to use false colors, though. In a battle one side might show up with the wrong colors to confuse their enemy and gain an element of surprise. They would only change to their real colors when it was too late for the enemy to react.
The term still means generally the same thing all these years later. It’s certainly interesting to see how terms get their origins and then keep their meaning when the origin is irrelevant.
