TAZ promotes growth, development and tumorigenesis by regulating the expression of target genes. However, the manner in which TAZ orchestrates the transcriptional responses is poorly defined. Here we demonstrate that TAZ forms nuclear condensates through liquid–liquid phase separation to compartmentalize its DNA-binding cofactor TEAD4, coactivators BRD4 and MED1, and the transcription elongation factor CDK9 for transcription. TAZ forms phase-separated droplets in vitro and liquid-like nuclear condensates in vivo, and this ability is negatively regulated by Hippo signalling through LATS-mediated phosphorylation and is mediated by the coiled-coil (CC) domain. Deletion of the TAZ CC domain or substitution with the YAP CC domain prevents the phase separation of TAZ and its ability to induce the expression of TAZ-specific target genes. Thus, we identify a mechanism of transcriptional activation by TAZ and demonstrate that pathway-specific transcription factors also engage the phase-separation mechanism for efficient and specific transcriptional activation.