Objectives: To assess the costs of the health effects of cigarette smoking and secondhand smoke (SHS) exposure to society. Design: Prevalence-based, disease-specific cost-of-illness study. We used an epidemiological population-attributable risk method to determine the costs that can be attributed to smoking and SHS exposure. Setting: Taiwan. Participants: All adult population aged 35 and older. Primary outcome measures: Direct costs of healthcare expenditures spent for treating tobacco-related diseases, indirect mortality costs measured by the value of lost productivity due to tobacco-related premature deaths and indirect morbidity costs measured by the value of time lost from work due to tobacco-related illness. Results: In 2010, direct costs of smoking and SHS exposure amounted to US$828 million, accounting for 3.4% of Taiwan's total personal healthcare expenditures. Smoking and SHS exposure also contributed to 15 555 premature deaths - corresponding to a loss of 284 765 years of life and US$820 million in productivity - and US$22 million in indirect morbidity costs. These direct and indirect costs totalled US$1670 million, representing 0.4% of Taiwan's gross domestic product and averaging about US$720/adult smoker. The share of the total costs was greater from active smoking (92%) than SHS exposure (8%), and greater for men (92%) than women (8%). Conclusions: Smoking and SHS exposure impose a huge financial loss in Taiwan. Sustained tobacco control efforts to encourage people to quit smoking, prevent smoking uptake by children and young adults and protect all people from SHS exposure are needed.