Digital identity is defined as the digital representation of the information known about a specific individual or organization. An emerging approach for protecting identities of individuals while at the same time enhancing user convenience is to focus on inter-organization management of identity information. This is referred to as federated identity management. In this paper we develop an approach to support privacy controlled sharing of identity attributes and harmonization of privacy policies in federated environments. Policy harmonizations mechanisms make it possible to determine whether or not the transfer of identity attributes from one entity to another violate the privacy policies stated by the former. We also provide mechanisms for tracing the release of user's identity attributes within the federation. Such approach entails a form of accountability since an entity non-compliant with the users original privacy preferences can be identified. Finally, a comprehensive security analysis details security properties is also offered.