Interactive Transparency on an Image

So right now I'm trying to get it so that dragging an active object over an image 'erases' the portion of the image that the active object has overlapped with (ie, dragging an inchworm over a leaf will leave a bitemark trail), but I can't seem to figure out how to make the transparency change affect only the part of the image that's been touched instead of making the whole image invisible.

Is there a way to change transparency on only a portion of an image or create some sort of masking where an active object has been?

Looki's Surface Object maybe?

(Terrain example from Anders Riggelsen)

That's beautiful, thank you so much