The oldest theropod dinosaurs are known from the Carnian of Argentina and Brazil. However, the evolutionary diversification of this group after its initial radiation but prior to the Triassic-Jurassic boundary is still poorly understood because of a sparse fossil record near that boundary. Here, we report on a new basal theropod, Daemonosaurus chauliodus gen. et sp. nov., from the latest Triassic 'siltstone member' of the Chinle Formation of the Coelophysis Quarry at Ghost Ranch, New Mexico. Based on a comprehensive phylogenetic analysis, Daemonosaurus is more closely related to coeval neotheropods (e.g. Coelophysis bauri) than to Herrerasauridae and Eoraptor. The skeletal structure of Daemonosaurus and the recently discovered Tawa bridge a morphological gap between Eoraptor and Herrerasauridae on one hand and neotheropods on the other, providing additional support for the theropod affinities of both Eoraptor and Herrerasauridae and demonstrating that lineages from the initial radiation of Dinosauria persisted until the end of the Triassic. Various features of the skull of Daemonosaurus, including the procumbent dentary and premaxillary teeth and greatly enlarged premaxillary and anterior maxillary teeth, clearly set this taxon apart from coeval neotheropods and demonstrate unexpected disparity in cranial shape among theropod dinosaurs just prior to the end of the Triassic.