Microbial transglutaminases (MTGs) catalyze the formation of Gln–Lys isopeptide bonds and are widely used for the cross-linking of proteins and peptides in food and biotechnological applications (e.g. to improve the texture of protein-rich foods or in generating antibody-drug conjugates). Currently used MTGs have low substrate specificity, impeding their biotechnological use as enzymes that do not cross-react with nontarget substrates (i.e. as bio-orthogonal labeling systems). Here, we report the discovery of an MTG from Kutzneria albida (KalbTG), which exhibited no cross-reactivity with known MTG substrates or commonly used target proteins, such as antibodies. KalbTG was produced in Escherichia coli as soluble and active enzyme in the presence of its natural inhibitor ammonium to prevent potentially toxic cross-linking activity. The crystal structure of KalbTG revealed a conserved core similar to other MTGs but very short surface loops, making it the smallest MTG characterized to date. Ultra-dense peptide array technology involving a pool of 1.4 million unique peptides identified specific recognition motifs for KalbTG in these peptides. We determined that the motifs YRYRQ and RYESK are the best Gln and Lys substrates of KalbTG, respectively. By first reacting a bifunctionalized peptide with the more specific KalbTG and in a second step with the less specific MTG from Streptomyces mobaraensis, a successful bio-orthogonal labeling system was demonstrated. Fusing the KalbTG recognition motif to an antibody allowed for site-specific and ratio-controlled labeling using low label excess. Its site specificity, favorable kinetics, ease of use, and cost-effective production render KalbTG an attractive tool for a broad range of applications, including production of therapeutic antibody-drug conjugates.