diff --git a/src/resources/extensions/gsd/git-service.ts b/src/resources/extensions/gsd/git-service.ts
index ad2d6f3c3..a3d3ddf97 100644
--- a/src/resources/extensions/gsd/git-service.ts
+++ b/src/resources/extensions/gsd/git-service.ts
@@ -336,13 +336,17 @@ export class GitServiceImpl {
    * @param extraExclusions Additional pathspec exclusions beyond RUNTIME_EXCLUSION_PATHS.
    */
   private smartStage(extraExclusions: readonly string[] = []): void {
-    // Always exclude .gsd/ — state is managed externally (symlinked to ~/.gsd/projects/<hash>/)
-    const allExclusions = [".gsd/", ...extraExclusions];
-
     // One-time cleanup: if runtime files are already tracked in the index
     // (from older versions where the fallback bug staged them), untrack them
     // in a dedicated commit. This must happen as a separate commit because
     // the git reset HEAD step below would otherwise undo the rm --cached.
+    //
+    // SAFETY: Only untrack the specific RUNTIME paths (activity/, runtime/,
+    // auto.lock, etc.) — NOT all of .gsd/. If .gsd/milestones/ files were
+    // previously tracked, they stay tracked until the milestone completes
+    // and the worktree is torn down. This prevents a mid-execution behavioral
+    // discontinuity where the first half of a milestone has .gsd/ artifacts
+    // committed but the second half doesn't (#1326).
     if (!this._runtimeFilesCleanedUp) {
       let cleaned = false;
       for (const exclusion of RUNTIME_EXCLUSION_PATHS) {
@@ -357,17 +361,19 @@ export class GitServiceImpl {
 
     // Stage everything, then unstage excluded paths.
     //
-    // Previous approach used pathspec excludes (:(exclude)...) with git add -A,
-    // but that fails when .gsd/ is in .gitignore — git exits non-zero before
-    // evaluating the excludes. The catch fallback ran plain `git add -A`,
-    // staging all tracked runtime files unconditionally and defeating the
-    // exclusion list entirely.
+    // Exclude only RUNTIME paths from staging — not the entire .gsd/ directory.
+    // When .gsd/milestones/ files are already tracked in the index (projects
+    // where .gsd/ is not gitignored, or Windows junctions that git sees as
+    // real directories), they should continue to be committed. Excluding the
+    // entire .gsd/ directory mid-milestone causes silent commit failure where
+    // the second half of a milestone's artifacts are never committed (#1326).
     //
-    // git reset HEAD silently succeeds when the path isn't staged, so no
-    // error handling is needed per-path.
+    // If .gsd/ IS in .gitignore (the default for external state projects),
+    // git add -A already skips it and the reset is a harmless no-op.
     nativeAddAll(this.basePath);
 
-    for (const exclusion of allExclusions) {
+    const runtimeExclusions = [...RUNTIME_EXCLUSION_PATHS, ...extraExclusions];
+    for (const exclusion of runtimeExclusions) {
       try { nativeResetPaths(this.basePath, [exclusion]); } catch { /* path not staged — ignore */ }
     }
   }
diff --git a/src/resources/extensions/gsd/tests/git-service.test.ts b/src/resources/extensions/gsd/tests/git-service.test.ts
index fed685602..3a67f6604 100644
--- a/src/resources/extensions/gsd/tests/git-service.test.ts
+++ b/src/resources/extensions/gsd/tests/git-service.test.ts
@@ -1086,9 +1086,9 @@ async function main(): Promise<void> {
     rmSync(repo, { recursive: true, force: true });
   }
 
-  // ─── smartStage always excludes .gsd/ ──────────────────────────────
+  // ─── smartStage excludes runtime files but allows milestone artifacts ──
 
-  console.log("\n=== smartStage always excludes .gsd/ ===");
+  console.log("\n=== smartStage excludes runtime files, allows milestone artifacts ===");
 
   {
     const repo = mkdtempSync(join(tmpdir(), "gsd-smart-stage-excludes-"));
@@ -1098,21 +1098,30 @@ async function main(): Promise<void> {
     writeFileSync(join(repo, "README.md"), "init");
     run("git add -A && git commit -m init", repo);
 
-    // Create .gsd/ planning files + a normal source file
+    // Create .gsd/ runtime files + milestone artifacts + a normal source file
     mkdirSync(join(repo, ".gsd", "milestones", "M001"), { recursive: true });
+    mkdirSync(join(repo, ".gsd", "runtime"), { recursive: true });
+    mkdirSync(join(repo, ".gsd", "activity"), { recursive: true });
     writeFileSync(join(repo, ".gsd", "milestones", "M001", "ROADMAP.md"), "# Roadmap");
     writeFileSync(join(repo, ".gsd", "preferences.md"), "---\nversion: 1\n---");
+    writeFileSync(join(repo, ".gsd", "STATE.md"), "# State");
+    writeFileSync(join(repo, ".gsd", "runtime", "units.json"), "{}");
+    writeFileSync(join(repo, ".gsd", "activity", "log.jsonl"), "{}");
     writeFileSync(join(repo, "src.ts"), "const x = 1;");
 
-    // smartStage always excludes .gsd/ — state is managed externally
+    // smartStage excludes only runtime paths, not all of .gsd/ (#1326)
     const svc = new GitServiceImpl(repo);
     const msg = svc.commit({ message: "test commit" });
-    assertTrue(msg !== null, "smartStage: commit succeeds with non-.gsd files");
+    assertTrue(msg !== null, "smartStage: commit succeeds");
 
-    // .gsd/ files should NOT be in the commit
     const committed = run("git show --name-only HEAD", repo);
-    assertTrue(!committed.includes(".gsd/"), "smartStage: .gsd/ files not in commit");
     assertTrue(committed.includes("src.ts"), "smartStage: source files ARE in commit");
+    // Runtime files should NOT be committed
+    assertTrue(!committed.includes(".gsd/STATE.md"), "smartStage: STATE.md excluded (runtime)");
+    assertTrue(!committed.includes(".gsd/runtime/"), "smartStage: runtime/ excluded");
+    assertTrue(!committed.includes(".gsd/activity/"), "smartStage: activity/ excluded");
+    // Milestone artifacts SHOULD be committed when not gitignored (#1326)
+    assertTrue(committed.includes(".gsd/milestones/"), "smartStage: milestone artifacts ARE committed");
 
     rmSync(repo, { recursive: true, force: true });
   }