The MouseUp event handler adds a point to close the area if necessary. It then uses the points to create a graphics Path object. It makes a Bitmap containing a copy of a background picture and then makes a Graphics object attached to the Bitmap.

Next the protgram fills the new bitmap with transparent color (alpha = 0). It uses the Graphics object's SetClip method to restrict drawing to the Path and then uses DrawImage to copy the original picture onto the background (in the restricted area). The result is a picture that is transparent everywhere except where the picture inside the Path was copied.

Private m_Points() As Point
Private m_MaxPoint As Integer

' Start selecting a region.
Private Sub picVisible_MouseDown(ByVal sender As Object, _
    ByVal e As System.Windows.Forms.MouseEventArgs) Handles _
    picVisible.MouseDown
    ' Erase any previous drawing.
    picVisible.Image = DirectCast(picOriginal.Image.Clone, _
        Bitmap)

    ' Save the starting point.
    m_MaxPoint = 0
    ReDim m_Points(m_MaxPoint)
    m_Points(m_MaxPoint).X = e.X
    m_Points(m_MaxPoint).Y = e.Y
End Sub

' Continue selecting a region.
Private Sub picVisible_MouseMove(ByVal sender As Object, _
    ByVal e As System.Windows.Forms.MouseEventArgs) Handles _
    picVisible.MouseMove
    ' Do nothing if we're not selecting a region.
    If m_Points Is Nothing Then Exit Sub

    ' Save the new point.
    m_MaxPoint += 1
    ReDim Preserve m_Points(m_MaxPoint)
    m_Points(m_MaxPoint).X = e.X
    m_Points(m_MaxPoint).Y = e.Y

    ' Draw the latest line.
    Dim gr As Graphics = picVisible.CreateGraphics
    gr.DrawLine(Pens.Yellow, _
        m_Points(m_MaxPoint).X, _
        m_Points(m_MaxPoint).Y, _
        m_Points(m_MaxPoint - 1).X, _
        m_Points(m_MaxPoint - 1).Y)
End Sub

' Finish selecting a region.
Private Sub picVisible_MouseUp(ByVal sender As Object, _
    ByVal e As System.Windows.Forms.MouseEventArgs) Handles _
    picVisible.MouseUp
    ' Do nothing if we're not selecting a region.
    If m_Points Is Nothing Then Exit Sub

    ' Close the region.
    If (m_Points(0).X <> m_Points(m_MaxPoint).X) Or _
       (m_Points(0).Y <> m_Points(m_MaxPoint).Y) _
    Then
        ' Save the new point.
        m_MaxPoint += 1
        ReDim Preserve m_Points(m_MaxPoint)
        m_Points(m_MaxPoint).X = m_Points(0).X
        m_Points(m_MaxPoint).Y = m_Points(0).Y
    End If

    ' Make the points into a Path.
    Dim selected_path As New _
        System.Drawing.Drawing2D.GraphicsPath(Drawing2D.FillMode.Winding)
    selected_path.AddLines(m_Points)

    ' Make the drawing permanent.
    Dim bm_visible As Bitmap = _
        DirectCast(picOriginal.Image.Clone, Bitmap)
    Dim gr_visible As Graphics = _
        Graphics.FromImage(bm_visible)
    gr_visible.DrawPath(Pens.Orange, selected_path)
    picVisible.Image = bm_visible

    ' Copy the picture into picHidden 
    ' with a transparent background and
    ' restricting it to the selected region.
    Dim bm_copy As New Bitmap(bm_visible.Width, _
        bm_visible.Height)
    Dim gr_copy As Graphics = Graphics.FromImage(bm_copy)
    ' Fill with a transparent background.
    gr_copy.Clear(Color.FromArgb(0, 0, 0, 0))
    ' Clip to the path.
    gr_copy.SetClip(selected_path)
    ' Copy the image.
    gr_copy.DrawImage(picOriginal.Image, 0, 0)
    ' Display the result.
    picCopy.Image = bm_copy

    ' We're no longer selecting a region.
    m_Points = Nothing
    btnCopy.Enabled = True
End Sub

' Save the intermediate image to the clipboard.
Private Sub btnCopy_Click(ByVal sender As System.Object, _
    ByVal e As System.EventArgs) Handles btnCopy.Click
    Clipboard.SetDataObject( _
        DirectCast(picCopy.Image.Clone, Bitmap), _
        True)
    Beep()
End Sub

' Paste the clipboard image onto the result picture.
Private Sub btnPaste_Click(ByVal sender As System.Object, _
    ByVal e As System.EventArgs) Handles btnPaste.Click
    ' See if the clipboard contains bitmap data.
    Dim clipboard_data As IDataObject = _
        Clipboard.GetDataObject()
    If clipboard_data.GetDataPresent(GetType(Bitmap)) Then
        ' Copy the clipboard bitmap onto the background.
        Dim bm_result As Bitmap = _
            DirectCast(picBackground.Image.Clone, Bitmap)
        Dim gr_result As Graphics = _
            Graphics.FromImage(bm_result)
        gr_result.DrawImage( _
            DirectCast(clipboard_data.GetData(GetType(Bitmap)), _
                Bitmap), _
            0, 0)
        picResult.Image = bm_result
    End If
End Sub

For more information on graphics programming in Visual Basic (not VB .NET), see my book Visual Basic Graphics Programming.