The rule was inspired by Portland resident Jamie Shupe, an army veteran who became the first American to legally change their gender to non-binary, thanks to a ruling by an OR circuit court previous year.
LGBT rights organizations hailed Thursday's move.
Gender non-binary residents will soon be able to select "X" for non-specified gender when they apply for their identification cards.
The Oregon DMV chose to change their rules after Jamie Shupe, a non-binary Oregonian, successfully petitioned a judge to recognize them as neither male nor female.
The Transportation Commission convened an advisory group on the third gender option and held public hearings on it, in which the people speaking in favor of it far outnumbered those opposed, although one of the opponents called it "political correctness gone haywire".
Last year, intersex activist and Navy veteran Dana Zzyym sued the federal government for the right to choose a third gender on their passport.
Jury begins deliberating charges brought against officer who fatally shot Philando Castile
Yanez said that gave him "strong suspicions" about Castile, so he concluded Philando was one of the robbery suspects. The defense attorney also refuted the inconsistencies in Yanez's statements using the word "it" instead of "gun".
"[This] can create a lot of barriers going through everyday life", Arli Christian, state policy counsel for the National Center for Transgender Equality, said in a phone call, "We found that almost one-third of transgender people who showed an ID that did not match their gender presentation were verbally harassed, denied benefits or services, asked to leave an establishment or even assaulted". The change is effective July 1 and does not need a doctor's note to take place.
A 2015 survey of more than 27,000 transgender people across all 50 states found that 68 percent of respondents didn't have an ID reflecting their preferred name or gender. We know gender is a spectrum and some people don't identify as male or female.
OR didn't need legislative approval for its measure, the Oregonian reports, because it doesn't have a law requiring people to identify as male or female on their licenses.
As for the licenses, the final decision was ultimately up to the Oregon Department of Motor Vehicles.
It also looks like OR won't be the only state with this nonbinary option for much longer.
As OPB's Kristian Foden-Vencil reported previous year, several other countries recognize a third gender, including India, Pakistan, Australia and Germany. 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.