Transposons comprise a major component of eukaryotic genomes, yet it remains controversial whether they are merely genetic parasites or instead significant contributors to organismal function and evolution. In plants, thousands of DNA transposons were recently shown to contain duplicated cellular gene fragments, a process termed transduplication. Although transduplication is a potentially rich source of novel coding sequences, virtually all appear to be pseudogenes in rice. Here we report the results of a genome-wide survey of transduplication in Mutator-like elements (MULEs) in Arabidopsis thaliana, which shows that the phenomenon is generally similar to rice transduplication, with one important exception: KAONASHI (KI). A family of more than 97 potentially functional genes and apparent pseudogenes, evidently derived at least 15 MYA from a cellular small ubiquitin-like modifier-specific protease gene, KI is predominantly located in potentially autonomous non-terminal inverted repeat MULEs and has evolved under purifying selection to maintain a conserved peptidase domain. Similar to the associated transposase gene but unlike cellular genes, KI is targeted by small RNAs and silenced in most tissues but has elevated expression in pollen. In an Arabidopsis double mutant deficient in histone and DNA methylation with elevated KI expression compared to wild type, at least one KI-MULE is mobile. The existence of KI demonstrates that transduplicated genes can retain protein-coding capacity and evolve novel functions. However, in this case, our evidence suggests that the function of KI may be selfish rather than cellular.