Beginning in July, Oregon residents who do not identify as male or female can mark X for sex on driver's licences, learner's permits and state IDs.
The state's Transportation Commission approved the new rule, which was hailed by LGBTQ rights groups.
The shift comes a year after an Oregon judge ruled a retired Army veteran could legally identify as non-binary.
The June 2016 landmark decision allowed Jamie Shupe to change her gender to non-binary, which refers to gender identities that do not fall into the binary categories of male and female. It was believed to be the first decision of its kind in the US.
That decision prompted Oregon officials to examine how they could recognise a third gender in its computer systems and affect the state's gender laws.
The state's Department of Motor Vehicles (DMV), which held public hearings to debate the issue, said they received little opposition to the policy change, according to the Oregonian newspaper.
"I very much plan to head to the nearest DMV and ask for that ID to be corrected on July 3rd," Jamie Shupe said after Thursday's decision.
"And then I'll no doubt stand out front of the building, or sit in the car and cry."
About 20,000 Oregonians identify as transgender, according to The Williams Institute at the University of California-Los Angeles.
Oregon is the only US state to allow an unspecified gender, but other countries including Germany, India, Pakistan, Australia and New Zealand also allow a third gender option.
The Canadian province of Ontario also implemented the X option earlier this year.
California is also considering a similar policy change. The state senate in May passed a bill to add a third gender option to official state documents, including birth certificates, sending the measure to the state assembly.
Commissioner Sean O'Hollaren told the Oregonian the decision was the "right thing to do".
"I hope those who will use X as an identifier will feel an element of comfort moving forward," he said. "It's something we're not only doing because legally our hand is forced. It's something we should do because it's the right thing to do."
Gender identity has become a major flashpoint across the US in places like North Carolina, which passed a bill forcing students to use toilets according to the sex listed on their birth certificates.
The state passed a bill easing some of those restrictions in March, but Texas is considering a similar measure.
US President Donald Trump in February also rescinded his predecessor's guidance to US public schools that allowed transgender students to use toilets matching their gender identity.
Oregon has become the first US state to include a third gender option on state-issued identification cards.