The social media giant is adding a customisable option with about 50 different terms people can use to identify their gender as well as three preferred pronoun choices: him, her or them.
Facebook said the changes, shared with The Associated Press before the launch on Thursday, initially cover the company's 159 million monthly users in the US and are aimed at giving people more choices in how they describe themselves, such as androgynous, bi-gender, intersex, gender fluid or transsexual.
Facebook plans to take it global after working with activists abroad to come up with terms appropriate in other countries.
"There's going to be a lot of people for whom this is going to mean nothing, but for the few it does impact, it means the world," said Facebook software engineer Brielle Harrison, who worked on the project and is undergoing gender transformation from male to female.
She said she was changing her Facebook identity from Female to TransWoman.
"All too often, transgender people like myself and other gender-nonconforming people are given this binary option, do you want to be male or female? What is your gender? And it's kind of disheartening because none of those let us tell others who we really are," she said. "This really changes that, and for the first time I get to go to the site and specify to all the people I know what my gender is."
Facebook, which has 1.23 billion active monthly users around the world, also allows them to keep their gender identity private and will continue to do so.
The Williams Institute, a think tank based at the University of California, Los Angeles, estimates that at least 700,000 individuals in the US identify as transgender, an umbrella term that includes people who live as a gender different from the one assigned to them at birth.
The change to the gender selection option is seen as a major step toward acceptance for people who don't self-identify as male or female, but the high-profile development seemed senseless to those who believe in two genders, no more.
"Of course Facebook is entitled to manage its wildly popular site as it sees fit, but here is the bottom line: It's impossible to deny the biological reality that humanity is divided into two halves: male and female," said Jeff Johnston, an issues analyst for Focus on the Family, an influential national religious organisation.
"Those petitioning for the change insist that there are an infinite number of genders, but just saying it doesn't make it so. That said, we have a great deal of compassion for those who reject their biological sex and believe they are the opposite sex."
Masen Davis, executive director of the Transgender Law Centre, said it may be hard for some people to understand the importance of having the ability to select from multiple genders online, but he said many transgender people will be thrilled with the change.
"We applaud Facebook for making it possible for people to be their authentic selves online," he said.
In the past decade, the transgender movement has become much more organised and outspoken, demanding the kind of civil rights and respect already sought by gay activists.
During this time, the transgender umbrella has been growing well beyond transsexuals to encompass a wide variety of gender identities.
The move by Facebook came after years of lobbying from users, some who started Facebook pages to petition for the change.
Google+ offers male, female and "other" as choices, but transgender advocates said Facebook's many specific options puts the platform well-ahead of any other online community. About one per cent of Google+ users identify as other.
At this point, Facebook targets advertising according to male or female genders.
For those who change to something neutral, ads will be targeted based on the pronoun they select for themselves, but Facebook said advertisers cannot target ads to those who declare themselves transgender or recently changed their gender because unlike getting engaged or married, changing gender is not registered as a "life event" on the site and won't post on timelines.
New gender options available to US Facebook users:
Female to Male
Male to Female