The new DSM eliminates the term "gender identity disorder," long considered stigmatizing by mental health specialists and lesbian, gay, bisexual and transgender activists.
That old diagnosis meant that a man who believed he was destined to be a woman was considered mentally ill.
No longer so.
The new DSM refers to "gender dysphoria," which focuses the attention on only those who feel distressed by their gender identity.
"I think it's a significant change," said Jack Drescher, a member of the American Psychiatric Association group that made the recommendation after working on it for four years. "It's clinically defensible, but it reduces the amount of stigma and harm that existed before."
Drescher said there had been calls to remove the diagnosis altogether just as homosexuality was removed from the DSM in 1973. Drescher said he believes that removal changed world opinion on homosexuality.
But gender dysphoria was left as a diagnosis to ensure that a transgender person could still access health care if needed. Hormone treatment would be one example. Another would be counseling for those who need help dealing with their emotions.
Many LGBT activists felt that the gender dysphoria diagnosis could be a powerful legal tool when challenging discrimination in health insurance plans and services.
The National Center for Transgender Equality said it was pleased with the change.
"It will mark a significant lowering of the stigmatization that many trans people have faced," said Mara Keisling, executive director of the center.
"The changes help make clear that there is nothing pathological about having a transgender identity, and that the role of the mental health profession is to affirm and support individuals in being themselves in the face of societal misunderstanding," she said.
But others were not satisfied.
Transgender activist Kelley Winters, founder of a group calling for the reform of gender identity disorder, said the new DSM does not go far enough.
The new criteria "represent some forward progress on issues of social stigma and barriers to medical transition care, for those who need it," Winters wrote on her blog.
"However, they do not go nearly far enough in clarifying that nonconformity to birth-assigned roles and victimization from societal prejudice do not constitute mental pathology."
The greater issue, though, may be the larger sociopolitical impact the new category will have, wrote Dr. Dana Beyer, a public health and LGBT civil rights advocate who also served on the American Psychiatric Association's working group.
"Our greatest accomplishment on the Working Group was reconceptualizing the state of 'being trans' from a mental illness to a normal human variant," she wrote on The Huffington Post.
She noted that back in 1990, trans persons were lumped together with pedophiles in the Americans With Disabilities Act. The new DSM, she said, "finally brings trans persons into the light with the rest of the community of humanity."