US officials say the Pentagon will lift its ban on openly transgender service personnel next month.
Defence Secretary Ash Carter has called the regulation outdated and harmful to the military.
The disclosure has been welcomed by campaigners for transgender rights.
It comes after the US Army Secretary, Eric Fanning, formally took office. He is the first openly gay person to become the top civilian official in any branch of the American military.
The US military ended its ban on openly gay and lesbian service personnel in 2011.
The latest repeal would require each branch of the US military to implement new policies covering recruitment, housing and uniforms for transgender personnel, an official quoted by US media said.
“Our transgender service members and their families are breathing a huge sigh of relief,” said Ashley Broadway-Mack, president of the American Military Partner Association.
But Republican lawmaker Mac Thornberry, who chairs the House of Representatives Armed Services Committee, said Ash Carter had still not answered some of its questions about the move.
“If reports are correct, I believe Secretary Carter has put the political agenda of a departing administration ahead of the military’s readiness crisis,” he said in a statement.
Estimates by the National Center for Transgender Equality say up to 15,000 transgender people serve in the US military.