Transgender rights and discrimination against transgender people are growing public policy issues. Theorizing from social, cognitive, and evolutionary psychology suggests that beyond attitudes, discrimination against transgender people may derive from folk theories about what gender is and where it comes from. Transgender identity is met with hostility, in part, because it poses a challenge to the lay view that gender is determined at birth, and based on observable physical and behavioral characteristics. Here, in two pre-registered studies (N = 1323), we asked American adults to indicate the gender of a transgender target who either altered their biology through surgical interventions or altered their outward appearance: to what extent is it their birth-assigned gender or their self-identified gender? Responses correlate strongly with affect toward transgender people, measured by feeling thermometers, yet predict views on transgender people's right to use their preferred bathrooms above and beyond feelings. Compared to male participants, female participants judge the person's gender more in line with the self-identified gender than the birth-assigned gender. This is consistent with social and psychological theories that posit high status (e.g., men) and low status (e.g., women) members of social classification systems view group hierarchies in more and less essentialist ways respectively. Gender differences in gender category beliefs decrease with religiosity and conservatism, and are smaller in higher age groups. These results suggest that folk theories of gender, or beliefs about what gender is and how it is determined have a unique role in how transgender people are viewed and treated. Moreover, as evident by the demographic variability of gender category beliefs, folk theories are shaped by social and cultural forces and are amenable to interventions. They offer an alternative pathway to measure policy support and possibly change attitude toward transgender people.