The exogenous and pathogenic Jaagsiekte sheep retrovirus (JSRV) coexists with highly related and biologically active endogenous retroviruses (enJSRVs). The endogenous enJS56A1 locus possesses a defective Gag polyprotein which blocks the late replication steps of related exogenous and endogenous retroviruses by a mechanism known as JSRV late restriction (JLR). Conversely, enJSRV-26, which most likely integrated into the sheep genome less than 200 years ago, is able to escape JLR. In this study, we demonstrate that the ability of enJSRV-26 to escape JLR is due to a single-amino-acid substitution in the signal peptide (SP) of its envelope glycoprotein. We show that enJSRV-26 SP does not localize to the nucleolus, unlike the functional SPs of related exogenous and endogenous sheep betaretroviruses. In addition, enJSRV-26 SP function as a posttranscriptional regulator of viral gene expression is impaired. enJSRV-26 JLR escape relies on the presence of the functional enJS56A1 SP. Moreover, we show that the ratio between enJSRV-26 and enJS56A1 Gag is critical to elude JLR. Interestingly, we found that the domestic sheep has acquired, by genome amplification, several copies of the enJS56A1 provirus. These data further reinforce the notion that transdominant enJSRV proviruses have been positively selected in domestic sheep, and that the coevolution between endogenous and exogenous sheep betaretroviruses and their host is still occurring.