We study an XXZ spin chain, where each spin is coupled to an independent ohmic bath of harmonic oscillators at zero temperature. Using bosonization and numerical techniques, we show the existence of two phases separated by a Kosterlitz-Thouless transition. At low coupling with the bath, the chain remains in a Luttinger liquid (LL) phase with a reduced but finite spin stiffness, while above a critical coupling, the system is in a dissipative phase characterized by a vanishing spin stiffness. We argue that the transport properties are also inhibited: The LL is a perfect conductor, while the dissipative phase displays finite resistivity. Our results show that the effect of the bath can be interpreted as annealed disorder-inducing signatures of localization.