The country's Constitutional Court ruled Wednesday that current laws, which say that marriage is between a man and a woman, violate the Constitution.
The panel of judges has given the island's parliament, known as the Legislative Yuan, two years to amend or enact new laws, which could potentially make Taiwan the first place in Asia to allow same-sex marriage.
The island has a large gay community and its annual gay pride parade is the biggest in Asia but the issue of marriage equality has divided Taiwanese society, with thousands turning out in recent months to protest for and against marriage equality.
"This explanation is a step forward in the history of Taiwan's same-sex marriage," said Yu Mei-nu, a Taiwanese legislator.
Yu said the court's explanation means that even if lawmakers do not pass legislation allowing same-sex marriage in the next two years, gay couples will still be able to marry by this time in 2019.
"I hope that the legislators will have the moral courage to pass same-sex marriage into law, however it is hard to predict how long it will take, at this moment," she said. "The opposition toward gay marriage in Taiwan won't just gladly accept it and give up the debate, so the debate will continue."
Draft legislation is already making its way through Taiwan's Parliament but it has stalled.
"We feel that this is a huge success for the LGBT and marriage equality movement in Taiwan," said Wayne Lin, an activist who runs an LGBT hotline on the island.
"We want to amend the Civil Code so same-sex couples can get married... our target is to complete this whole process within this year."
Tsai Ing-wen, Taiwan's first female president, expressed support for gay marriage before her election in 2016.
"In the face of love, everyone is equal," she said in a Facebook video during 2015's gay pride parade.
"I support marriage equality. Every person should be able to look for love freely, and freely seek their own happiness."
The decision came in response to two requests for a Constitutional Court ruling on article 972 of Taiwan's civil code, which states that marriage is between a man and a woman.
One of the requests was filed in 2015 by Chi Chia-wei, a veteran gay rights activist who has spent more than half his life fighting for marriage equality in Taiwan, according to the island's official Central News Agency (CNA).
The other request was filed by the Taipei city government the same year after three same-sex couples lodged an administrative lawsuit against the government when their marriage registrations were rejected, CNA reported.
Elsewhere in Asia, the LGBT community has been facing increased persecution. South Korea has been cracking down on gay armed service members, while in Indonesia gay men have been facing more restrictions, with a recent raid on a gay sauna party and two men being caned for having homosexual sex in the conservative province of Aceh.
Japan does not recognize same-sex marriage, although a handful of cities and wards have legalized same-sex partnerships. However, LGBT people are not protected from discrimination under Japanese law.
Homosexuality is not illegal in China and the Communist government removed it from the official list of mental disorders 16 years ago, but activists and experts say that prejudice and discrimination persist.
Last year, a court in central China ruled against a gay couple in the country's first same-sex marriage lawsuit, dealing a blow to a nascent but increasingly visible campaign for LGBT equality.
No Asian nations are on the 23-strong list of countries that have legalized same-sex marriage, according to Pew Research, although it was permitted in New Zealand in 2013.