I think that they should just have Male, Female, and Other options for gender on a form. My hunch is that 98% of the population will choose the first 2 options, and half of the remaining 2% will be offended that they need to choose an Other option and perhaps type in their gender identity into a text field.
That said, it's only half of the remaining 2% that will be offended. You're never going to please everybody, and it's better than a giant dropdown list of 20 gender and identity options that confuses and annoys everybody.