The museum's path to its current form took twelve years. Planning began in 1986, when the Council for Cultural Affairs appointed a professor from Chinese Culture University to lead the project. The institution opened on April 21, 1990 — initially called the Taiwanese Opera Information Center, reflecting its original focus on gezaixi, the operatic form indigenous to Taiwan. Gezaixi is a vernacular art that developed in the early twentieth century, sung in Taiwanese Hokkien, with plots drawn from history, legend, and everyday life. But Yilan County proved to have a particularly rich collection of another tradition: glove puppetry, or budaixi, in which elaborately costumed hand puppets perform stories ranging from folklore to martial epic. Recognizing this, the institution expanded its scope and renamed itself the Taiwan Drama Center, before settling in 1998 on its current name, Taiwan Theater Museum.

Both gezaixi and budaixi endured the Japanese colonial period, during which cultural authorities periodically attempted to suppress Chinese-language performance in favor of Japanese cultural forms. They survived the years of KMT martial law, when Mandarin was promoted over Taiwanese Hokkien and folk arts were sometimes viewed with suspicion. They outlasted the arrival of television, which drew audiences away from live performance throughout the 1960s and 1970s. What brought them back — or rather, what revealed that they had never entirely left — was a broader Taiwanese cultural reawakening from the 1980s onward, as restrictions eased and communities sought to reclaim expressive traditions that belonged specifically to them. The Taiwan Theater Museum opened at the beginning of that reawakening, in 1990, three years after martial law ended on the main island of Taiwan in 1987.

Three floors organize the museum's holdings. The lobby on the ground floor centers on those deity effigies — a theatrical welcome that sets the tone. The second floor rotates temporary exhibitions, allowing the museum to respond to current scholarship, anniversary commemorations, or particular artists and troupes. The third floor holds the permanent collection: a wall of Taiwanese opera costumes in their full vibrancy, together with props, instruments, masks, and puppets. In 2002 the museum added the Taiwanese Opera Study Workshop, a space for hands-on learning where visitors — students especially — can engage with performance techniques rather than simply observe objects behind glass. The museum periodically hosts live gezaixi performances and puppet shows in its courtyard and exhibition spaces, keeping the work alive rather than merely archived.

Yilan County occupies a basin on Taiwan's northeastern coast, sheltered from Taipei by the Central Mountain Range and historically somewhat separate in its cultural development. The Taiwan Theater Museum has functioned as more than a repository — it is a statement about what Yilan considers worth preserving and presenting. Its mandate, as set out by the Ministry of Culture, encompasses not just collection and display but active outreach: evaluating the social and artistic significance of folk theater, encouraging fusion between traditional and contemporary forms, and deepening public understanding of why these art forms matter. Walking southwest from Yilan Station, visitors arrive not at a sealed institution presenting relics, but at a place where the question of what Taiwanese theater is — and what it might become — is still openly asked.