Horizontal gene transfer (HGT) is an important evolutionary process that allows the spread of innovations between distantly related organisms. We present evidence that prokaryotes (bacteria and archaea) are more likely to transfer genetic material with their close relatives than with distantly related lineages. This bias in transfer partners can create phylogenetic signals that are difficult to distinguish from the signal created through shared ancestry. Preferences for transfer partners can be revealed by studying the distribution patterns of divergent genes with identical functions. In many respects, these genes are similar to alleles in a population, except that they coexist only in higher taxonomic groupings and are acquired by a species through HGT. We also discuss the role of biased gene transfer in the formation of taxonomically recognizable natural groups in the tree or net of life.