[BUG] VS Code Chat panel Agent Handoff to Claude fails with "Error: Error during execution" (Windows, v2.1.145)

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Using the VS Code Chat panel (not the Claude Code tab) with the Agent Handoff set to Claude fails immediately with "Error: Error during execution". The Claude Code tab and CLI both work correctly — the issue is isolated to the VS Code Chat panel Agent Handoff integration.

The Claude VSCode output log shows repeated startup errors:
Marketplace configuration file is corrupted: local.source.source: Invalid input

This error fires multiple times on every startup and appears to be the root cause. The known_marketplaces.json file contained a "local" marketplace entry with "source": "local" which no longer passes schema validation. Removing that entry cleared the log errors but did not resolve the Chat panel failure.

What Should Happen?

Submitting a prompt via the VS Code Chat panel with Agent Handoff set to Claude should invoke Claude and return a response, the same as the Claude Code tab does. The marketplace schema validation should either accept the "local" source type or migrate/clean up legacy entries gracefully without breaking the Chat panel integration.

Error Messages/Logs

From the "Claude VSCode" Output channel:

[ERROR] Marketplace configuration file is corrupted: local.source.source: Invalid input
[ERROR] Marketplace configuration file is corrupted: local.source.source: Invalid input
[ERROR] Plugin autoupdate: failed: Marketplace configuration file is corrupted: local.source.source: Invalid input
[ERROR] Marketplace configuration file is corrupted: local.source.source: Invalid input

The known_marketplaces.json contained:
{
  "local": {
    "source": {
      "source": "local"
    },
    "installLocation": "C:\\Users\\<user>\\.claude\\plugins\\marketplaces\\local",
    "lastUpdated": "2026-05-20T00:00:00.000Z"
  }
}

VS Code Chat panel error shown to user: "Error: Error during execution"

Steps to Reproduce

1. Install Claude Code VS Code extension v2.1.145 on Windows 11
2. Open VS Code Chat panel (Ctrl+Alt+I or View > Chat)
3. Change the agent dropdown to "Claude" (Agent Handoff)
4. Type any prompt and submit
5. Observe: "Error: Error during execution" is returned immediately

Additional context:

• The Claude Code tab (Spark icon) works correctly with the same account and session
• The Claude CLI works correctly in terminal
• C:\Users\<user>\.claude\plugins\known_marketplaces.json contained a "local" source entry that fails schema validation on every startup (see logs above)

Claude Model

Not sure / Multiple models

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

v2.1.150

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

VS Code integrated terminal

Additional Information

_No response_