Cannot use MCP server with auth in Agent Host

Type: Bug

- Create a minimal FastMCP server with OAuth, run it on `localhost:8080`.
- Enable Agent Host + Claude `claudeUseCopilotProxy: false` (as recommended in https://github.com/microsoft/vscode/issues/314952#issuecomment-4805417409)
- Attempt to start MCP server in Agent Host session.

Result:
```
2026-07-16 09:29:04.835 [warning] [AgentSideEffects] startMcpServer failed for claude:/0595dd4c-a830-4e6a-97a7-48e0f8f40c0d Server status: needs-auth
```

VS Code version: Code 1.129.0 (125df4672b8a6a34975303c6b0baa124e560a4f7, 2026-07-15T00:08:44Z)
Tested in Insider build (Version: 1.130.0-insider, commit: bc2ac764ddd66802104366c182d490a03253f7e1) with the same result.
OS version: Darwin arm64 25.5.0
Modes:

System Info

|Item|Value|
|---|---|
|CPUs|Apple M4 (10 x 2400)|
|GPU Status|2d_canvas: enabled
GPU0: VENDOR= 0x106b [Google Inc. (Apple)], DEVICE=0x0000 [ANGLE (Apple, ANGLE Metal Renderer: Apple M4, Version 26.5.1 (Build 25F80))], DRIVER_VENDOR=Apple, DRIVER_VERSION=26.5.1 *ACTIVE*
Machine model name: Mac
Machine model version: 16.1
direct_rendering_display_compositor: disabled_off_ok
gpu_compositing: enabled
multiple_raster_threads: enabled_on
opengl: enabled_on
rasterization: enabled
raw_draw: disabled_off_ok
skia_graphite: enabled_on
trees_in_viz: disabled_off
video_decode: enabled
video_encode: enabled
webgl: enabled
webgpu: enabled
webnn: disabled_off|
|Load (avg)|2, 3, 3|
|Memory (System)|16.00GB (0.19GB free)|
|Process Argv|--crash-reporter-id aada86db-ac7e-4ed6-a644-5b2d7a252e9b --crash-reporter-id aada86db-ac7e-4ed6-a644-5b2d7a252e9b --crash-reporter-id aada86db-ac7e-4ed6-a644-5b2d7a252e9b|
|Screen Reader|no|
|VM|0%|
Extensions (75)

Name|Identifier|Author|Version
---|---|---|---
Markdown Preview Mermaid Support|bierner.markdown-mermaid|bierner|1.32.1
Ruff|charliermarsh.ruff|charliermarsh|2026.60.0
Structurizr|ciarant.vscode-structurizr|ciarant|0.0.9
systemd-unit-file|coolbear.systemd-unit-file|coolbear|1.0.8
Database Client JDBC|cweijan.dbclient-jdbc|cweijan|1.4.6
MySQL|cweijan.vscode-mysql-client2|cweijan|9.0.2
Rewrap Revived|dnut.rewrap-revived|dnut|1.16.3
Docker DX|docker.docker|docker|0.18.0
XML Tools|dotjoshjohnson.xml|DotJoshJohnson|2.5.1
HTML CSS Support|ecmel.vscode-html-css|ecmel|2.0.14
Prettier - Code formatter|esbenp.prettier-vscode|esbenp|12.4.0
Copy Relative Path and Line Numbers|ezforo.copy-relative-path-and-line-numbers|ezforo|0.3.1
GitHub Actions|github.vscode-github-actions|github|0.32.3
GitLab|gitlab.gitlab-workflow|GitLab|6.85.3
Renumber Selection|gruntfuggly.renumber-selection|Gruntfuggly|0.0.5
HashiCorp HCL|hashicorp.hcl|hashicorp|0.6.0
HashiCorp Terraform|hashicorp.terraform|hashicorp|2.39.4
Test Explorer UI|hbenl.vscode-test-explorer|hbenl|2.22.1
REST Client|humao.rest-client|humao|0.25.1
Output Colorizer|ibm.output-colorizer|IBM|0.1.2
Go Template Support|jinliming2.vscode-go-template|jinliming2|0.2.1
Home Assistant Config Helper|keesschollaart.vscode-home-assistant|keesschollaart|2.2.0
Python Test Explorer for Visual Studio Code|littlefoxteam.vscode-python-test-adapter|littlefoxteam|0.8.2
clangd|llvm-vs-code-extensions.vscode-clangd|llvm-vs-code-extensions|0.6.0
Code Coverage|markis.code-coverage|markis|1.12.0
Cortex-Debug|marus25.cortex-debug|marus25|1.12.1
Cortex-Debug: Device Support Pack - STM32F4|marus25.cortex-debug-dp-stm32f4|marus25|1.0.0
debug-tracker-vscode|mcu-debug.debug-tracker-vscode|mcu-debug|0.0.15
MemoryView|mcu-debug.memory-view|mcu-debug|0.0.29
Peripheral Viewer|mcu-debug.peripheral-viewer|mcu-debug|1.6.1
RTOS Views|mcu-debug.rtos-views|mcu-debug|0.0.16
Rainbow CSV|mechatroner.rainbow-csv|mechatroner|3.24.1
HTTP Client|mkloubert.vscode-http-client|mkloubert|0.34.0
Container Tools|ms-azuretools.vscode-containers|ms-azuretools|2.4.5
Docker|ms-azuretools.vscode-docker|ms-azuretools|2.0.0
Playwright Test for VSCode|ms-playwright.playwright|ms-playwright|1.1.19
Black Formatter|ms-python.black-formatter|ms-python|2026.6.0
Python Debugger|ms-python.debugpy|ms-python|2026.6.0
isort|ms-python.isort|ms-python|2026.6.0
Pylint|ms-python.pylint|ms-python|2026.6.0
Python|ms-python.python|ms-python|2026.4.0
Pylance|ms-python.vscode-pylance|ms-python|2026.2.1
Python Environments|ms-python.vscode-python-envs|ms-python|1.36.0
Jupyter|ms-toolsai.jupyter|ms-toolsai|2025.9.1
Jupyter Keymap|ms-toolsai.jupyter-keymap|ms-toolsai|1.1.2
Jupyter Notebook Renderers|ms-toolsai.jupyter-renderers|ms-toolsai|1.3.0
Jupyter Cell Tags|ms-toolsai.vscode-jupyter-cell-tags|ms-toolsai|0.1.9
Jupyter Slide Show|ms-toolsai.vscode-jupyter-slideshow|ms-toolsai|0.1.6
Dev Containers|ms-vscode-remote.remote-containers|ms-vscode-remote|0.466.0
Remote - SSH|ms-vscode-remote.remote-ssh|ms-vscode-remote|0.124.0
Remote - SSH: Editing Configuration Files|ms-vscode-remote.remote-ssh-edit|ms-vscode-remote|0.87.0
CMake Tools|ms-vscode.cmake-tools|ms-vscode|1.23.52
C/C++ DevTools|ms-vscode.cpp-devtools|ms-vscode|0.5.13
Live Preview|ms-vscode.live-server|ms-vscode|0.4.19
Makefile Tools|ms-vscode.makefile-tools|ms-vscode|0.12.17
Remote Explorer|ms-vscode.remote-explorer|ms-vscode|0.5.0
Test Adapter Converter|ms-vscode.test-adapter-converter|ms-vscode|0.2.1
VS Code Speech|ms-vscode.vscode-speech|ms-vscode|0.16.0
nRF Terminal|nordic-semiconductor.nrf-terminal|nordic-semiconductor|2026.6.352
Material Icon Theme|pkief.material-icon-theme|PKief|5.36.1
Ansible|redhat.ansible|redhat|26.6.0
YAML|redhat.vscode-yaml|redhat|1.24.0
Coverage Gutters|ryanluker.vscode-coverage-gutters|ryanluker|2.14.0
Svelte for VS Code|svelte.svelte-vscode|svelte|110.3.0
Even Better TOML|tamasfe.even-better-toml|tamasfe|0.21.2
Qt Core|theqtcompany.qt-core|theqtcompany|1.14.0
Qt C++|theqtcompany.qt-cpp|theqtcompany|1.14.0
Qt Qml|theqtcompany.qt-qml|theqtcompany|1.14.0
Qt UI|theqtcompany.qt-ui|theqtcompany|1.14.0
Helm Intellisense|tim-koehler.helm-intellisense|Tim-Koehler|0.15.0
Graphviz Interactive Preview|tintinweb.graphviz-interactive-preview|tintinweb|0.3.5
vscode-pets|tonybaloney.vscode-pets|tonybaloney|1.35.0
CMake|twxs.cmake|twxs|0.0.17
Jinja|wholroyd.jinja|wholroyd|0.0.8
Markdown All in One|yzhang.markdown-all-in-one|yzhang|3.6.3

A/B Experiments

```
vsliv368:30146709
pythonvspyt551cf:31249601
binariesv615:30325510
nativeloc1:31344060
dwcopilot:31170013
dwoutputs:31242946
copilot_t_ci:31333650
e5gg6876:31282496
pythonrdcb7:31342333
6518g693:31463988
aj953862:31281341
82j33506:31327384
6abeh943:31336334
envsactivate1:31551504
gh487529:31544284
cloudbuttont:31379625
3efgi100_wstrepl:31403338
ec5jj548:31422691
cp_cls_t_966_ss:31526232
c3h7c220:31478652
ge8j1254_inline_auto_hint_haiku:31490510
38bie571_auto:31478677
cp_cls_c_1081:31454833
conptydll_true:31498968
e9c30283:31461165
test_treatment2:31471001
46204921:31447328
capico_b_098a3278:31551524
idci7584:31464702
e3e4d672:31494082
ei9d7968:31496641
nes-extended-on:31455476
chat:31457767
8hig5102:31480529
89g7j272:31518289
7e187181:31503455
i2gc6536:31499202
52612955:31516516
ghj88844:31499326
ddid_t:31478206
hmra_i5g22:31518061
bjc72774_agent_sandbox:31543533
7df3h592:31512476
cp_cls_t_1082:31535311
logging_enabled_new:31498466
db5d2638:31499441
jb_cp_cls_t_632:31543129
b1ei0813:31506238
56dj4588:31512888
32d76977:31512328
ha629193:31508444
cdk-lw-on:31524445
f9bf7985:31543584
jh5f2457_c:31540921
hgf2d445:31529595
8hfba999:31537718
prpt_lrg:31518466
jbcp_cls_pctr_t:31531130
61138546:31518536
cp_intellij_t_nes:31548657
d7b18187:31526828
nes-curr-leftover-1500:31538366
h561g132:31533256
sessions_5:31532894
ihg5j128:31534457
f412h606:31551416
9gg7f176:31542112
sandbox-ui-on-2:31543161
fd5dc207:31551400

```