Originally from here.
Versions:
- VSCode Version: 1.46.1
- OS Version: Windows_NT x64 10.0.20161
Steps to Reproduce:
Install debian-dev-boilerplate inside WSL.
Setup powerlevel 10k.
Clone a git repo and enter its folder.
git clone git@github.com:DanielAtKrypton/debian-dev-boilerplate.git
cd debian-dev-boilerplate
You should now see something like:

Open vscode from zshell. By typing at the zshell prompt:
code .
At this point the bug is revealed when the terminal is opened for the first time inside vscode. At first glance, the terminal renders correctly the powerlevel10k theme. After half a second, the theme is deactivated as can be seen in the next picture.

Does this issue occur when all extensions are disabled?:
Yes. The first time vscode is launched, it installs a vanilla (with no extensions) vscode-server to the linux distro. And still the bug happens.
It is interesting to note that in prior vscode versions this functionality was working alright. For any reason I don't know this issue started to happen in the last couple weeks.
Additional Info:
Here is the log file when running the commands:
code . --log trace