A tag is a label you can apply to vCenter Server objects (datastores, VMs, hosts) to simplify the research, allowing better sorting. When a tag is created, it must be assigned to a category that groups related tags. A category also specifies whether you can assign one or multiple tags to an object. The creation and management of tags and categories is done through an intuitive configuration area, reachable from menu, then Tags & Custom Attributes:

For instance, you can use tags to classify your storage devices installed in your vSphere environment. Create Gold storage, Silver storage, and Bronze storage tags assigned to a storage device category associated to the datastore object type. Assigning these tags to the storage devices available in your network, you can categorize storage devices based on their performance and quickly identify what storage to use based on the requirements; for example, storage used in production will have different requirements as compared to storage used for a secondary backup.

To assign a tag, right-click on an object in the vCenter Inventory and select Tags & Custom Attributes | Assign Tag.

Some software backup solutions make use of tags to group VM with the same backup policy (for example, RTO), making the administration easier and more straightforward.