In order to prevent the wrong action of transformer differential protection, a new method to identify inrush current based on wavelet coefficient distribution is presented in this paper. This method is based on multi-resolution analysis in wavelet transform theory, the wavelet transform of the wavelet coefficients obtained two scales were extracted, calculate the variance changes, and set a reasonable threshold, to distinguish between inrush current and fault current. Application of MATLAB toolbox to build the transformer inrush current and fault current simulation model, simulation results show that this method can quickly and effectively on the inrush current and fault current to identify, to ensure the correct operation of differential protection.