Colour polymorphisms play a key role in sexual selection and speciation, yet the mechanisms that generate and maintain them are not fully understood. Here, we use genomic and transcriptomic tools to identify the precise genetic architecture and evolutionary history of a sex-linked colour polymorphism in the Gouldian finch Erythrura gouldiae that is also accompanied by remarkable differences in behaviour and physiology. We find that differences in colour are associated with an ~72-kbp region of the Z chromosome in a putative regulatory region for follistatin, an antagonist of the TGF-β superfamily genes. The region is highly differentiated between morphs, unlike the rest of the genome, yet we find no evidence that an inversion is involved in maintaining the distinct haplotypes. Coalescent simulations confirm that there is elevated nucleotide diversity and an excess of intermediate frequency alleles at this locus. We conclude that this pleiotropic colour polymorphism is most probably maintained by balancing selection.