Primary schoolchildren should be free to dress up in a tiara or superhero cloak without comment from teachers or pupils, the Church of England has said.
In bullying guidance issued to its schools, the Church said pupils should be free to explore "who they might be".
Archbishop of Canterbury Justin Welby said the guidance would help schools spread the Christian message "without exception or exclusion".
LGBT charity Stonewall said the advice would help to prevent bullying.
The advice comes as polling for the Anti-Bullying Alliance showed that two in five children "hide aspects of themselves" for fear of being bullied.
Of 1,600 eight to 16-year-olds questioned for this week's Anti-Bullying Week:
- almost two-thirds had witnessed people being bullied for being "different"
- over half feared being seen as different
- almost a quarter said they would change the way they look to conform
The Church, which educates one million pupils in nearly 5,000 schools, first issued guidance about homophobic bullying three years ago, but it has now been updated to cover transphobic and biphobic bullying.
In his foreword to the advice, the Most Reverend Justin Welby said: "We must avoid, at all costs, diminishing the dignity of any individual to a stereotype or a problem".
He said sexual orientation should never be the grounds for bullying or prejudice, adding that "significant progress" had been made since homophobic bullying guidance was issued in 2014.
The report, Valuing All God's Children, said children should be able to play with "the many cloaks of identity" without being labelled or bullied - "sometimes quite literally with the dressing-up box".
Nursery and primary school in particular is a time of "creative exploration", it said, where young people should be able to pick a tutu, tiara and heels - or a helmet, tool belt and superhero cloak - "without expectation or comment".
The guidance recognised there is a "breadth of views" among Christians and people of all beliefs towards same-sex marriage, sexual orientation and gender identity.
But it added: "The aim of this guidance is to prevent pupils in Church of England schools and academies from having their self-worth diminished or their ability to achieve impeded by being bullied because of their perceived or actual sexual orientation or gender identity."
Stonewall, a lesbian, gay, bisexual and transgender (LGBT) rights group, said the guidance gave "clear advice" to teachers on recognising and combating bullying in Church schools.
A spokesman said: "Our research shows that nearly half of lesbian, gay, bi and trans pupils are bullied for being LGBT at school: a situation that desperately needs to change."
Anti-Bullying Alliance national co-ordinator Martha Evans said the guidance struck a chord during anti-bullying week, "when we are shining a light on needing to celebrate what makes us all different and equal".
"Schools have duties under law to ensure they do not discriminate against a pupil or prospective pupil by treating them less favourably because of their gender or sexual orientation.
"It is so important children are able to be themselves without fear of bullying."