The ban was announced by Mr Trump during his first year in office.
"Transgender service members will no longer be subject to the possibility of discharge or separation on the basis of gender identity," the White House said.
There were 8,980 active duty transgender troops in 2019, according to Department of Defence data analysed by the Palm Center, a non-profit group.
"President Biden believes that gender identity should not be a bar to military service, and that America's strength is found in its diversity," the White House statement added.
New Defence Secretary Lloyd Austin, a retired army general, said in a statement: "The Department will immediately take appropriate policy action to ensure individuals who identify as transgender are eligible to enter and serve in their self-identified gender."
"The United States Armed Forces are in the business of defending our fellow citizens from our enemies, foreign and domestic. I believe we accomplish that mission more effectively when we represent all our fellow citizens," he added.
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