Is "flag" actually clearer if you're not already familiar with the term from command-line "flags"? Personally I always thought it was kind of a weird usage, pretty far from the literal meaning.
I can't remember where I first heard it, but I'm sure it was before I'd used command lines. I always thought it came from the little flags on the side of some mailboxes.
etymonline doesn't have an entry for flag as a noun meaning boolean, but this might be related:
> flag (v.2) 1875, "place a flag on or over," from flag (n.1). Meaning "designate as someone who will not be served more liquor," by 1980s, probably from use of flags to signal trains, etc., to halt, which led to a verb meaning "inform by means of signal flags" (1856, American English). Meaning "to mark so as to be easily found" is from 1934 (originally by means of paper tabs on files). Related: Flagged; flagging.
etymonline doesn't have an entry for flag as a noun meaning boolean, but this might be related:
> flag (v.2) 1875, "place a flag on or over," from flag (n.1). Meaning "designate as someone who will not be served more liquor," by 1980s, probably from use of flags to signal trains, etc., to halt, which led to a verb meaning "inform by means of signal flags" (1856, American English). Meaning "to mark so as to be easily found" is from 1934 (originally by means of paper tabs on files). Related: Flagged; flagging.