How to use dynamic/variable image tag in a Kubernetes deployment?

In our project, which also uses Kustomize, our base deployment.yaml file looks like this:

apiVersion: apps/v1
kind: Deployment
metadata:
  name: nginx-deployment
  labels:
    app: nginx
spec:
  replicas: 3
  selector:
    matchLabels:
      app: nginx
  template:
    metadata:
      labels:
        app: nginx
    spec:
      containers:
      - name: nginx
        image: nginx:IMAGE_TAG # <------------------------------
        ports:
        - containerPort: 80

Then we use sed to replace IMAGE_TAG with the version of the image we want to deploy.

Is there a more sophisticated way to do this, rather than editing the text yaml file using sed?

There is a specific transformer for this called the images transformer. You can keep your deployment as it is, with or without tag:

apiVersion: apps/v1
kind: Deployment
metadata:
  name: nginx-deployment
  labels:
    app: nginx
spec:
  replicas: 3
  selector:
    matchLabels:
      app: nginx
  template:
    metadata:
      labels:
        app: nginx
    spec:
      containers:
      - name: nginx
        image: nginx
        ports:
        - containerPort: 80

and then in your kustomization file:

apiVersion: kustomize.config.k8s.io/v1beta1
kind: Kustomization

resources:
  - deployment.yaml

images:
  - name: nginx
    newTag: MYNEWTAG

Do keep in mind that this will replace the tag of all the nginx images of all the resources included in your kustomization file. If you need to run multiple versions of nginx you can replace the image name in your deployment by a placeholder and have different entries in the transformer.