Under the new rules, transgender service personnel must serve under their biological sex, rather than the gender they identify with and must wear the uniform in line with the gender listed on their birth certificate.
Personnel with gender dysphoria will no longer be allowed medical surgeries for transitioning unless they started the process before the new law came into force.
Some US military officials will be given the power to waive the policy for use of showers, bathrooms and other physical standards, depending on the circumstances of each case.
The new rules, however, do fall short of the total ban initially called for by President Trump in 2017.
President Trump said at the time: "Our military must be focused on decisive and overwhelming victory and cannot be burdened with the tremendous medical costs and disruption that transgender in the military would entail,"
Campaigners have condemned the policy as "cruel" and "irrational".
When asked about implications on British personnel, a Ministry of Defence spokesperson told Forces News: "We are clear that all members of our armed forces play a vital role in keeping our nation safe.
"We will continue to welcome people from a diverse range of backgrounds, including transgender personnel."