Lawmakers in the country have also introduced the legislation to accommodate people born with untypical sexual anatomy – but campaigners LGBT say it doesn't go far enough.
Angela Merkel’s government in August voted to introduce the third category of "various", alongside male and female, on birth certificates and other documents.
Both chambers of parliament have approved the new law, with the Bundesrat upper house giving its backing on Friday.
LGBT advocacy groups and some opposition politicians argue the resulting legislation is not enough – because, it most cases it requires people to produce a doctor's certificate to change their status.
The new law came after Germany's highest court ruled last year that people must be allowed to register as neither male nor female, ordering authorities to create a third identity or scrap gender entries altogether.
That followed a case in which a plaintiff had sought unsuccessfully to have their entry in the birth register changed from "female" to "inter/diverse" or "diverse."
Until now, the only other option was to leave the gender blank.
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