How do I fix a cipher mismatch issue with sftp?

The Cipher directive is for SSH version 1 (which is not in use nowadays).

For SSH version 2, use the Ciphers:

sftp -oCiphers=aes256-ctr

See the ssh_config man page.

Though note that the sftp supports the -c switch too. So there's no need for using the -o.

See the sftp man page:

-c cipher

Selects the cipher to use for encrypting the data transfers.
This option is directly passed to ssh(1).

The option is supported since OpenSSH 5.4. The change is disguised as "Support most of scp(1)'s commandline arguments in sftp(1)".

Note the command-line argument -c is primarily an equivalent to the Ciphers directive (while it can fall back to the Cipher). Quote from the ssh man page:

-c cipher_spec

Selects the cipher specification for encrypting the session.
Protocol version 1 allows specification of a single cipher. The supported values are “3des”, “blowfish”, and “des”. For protocol version 2, cipher_spec is a comma-separated list of ciphers listed in order of preference. See the Ciphers keyword in ssh_config(5) for more information.