diff --git a/resources/darwin/bin/code.sh b/resources/darwin/bin/code.sh
index 1d66515c2c7..de5c3bfcab0 100755
--- a/resources/darwin/bin/code.sh
+++ b/resources/darwin/bin/code.sh
@@ -31,5 +31,9 @@ fi
 CONTENTS="$APP_PATH/Contents"
 ELECTRON="$CONTENTS/MacOS/Electron"
 CLI="$CONTENTS/Resources/app/out/cli.js"
+export VSCODE_NODE_OPTIONS=$NODE_OPTIONS
+export VSCODE_NODE_REPL_EXTERNAL_MODULE=$NODE_REPL_EXTERNAL_MODULE
+unset NODE_OPTIONS
+unset NODE_REPL_EXTERNAL_MODULE
 ELECTRON_RUN_AS_NODE=1 "$ELECTRON" "$CLI" "$@"
 exit $?
diff --git a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
index 22aedd0758c..27ccb9cb61f 100644
--- a/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
+++ b/src/vs/workbench/contrib/terminal/common/terminalEnvironment.ts
@@ -13,7 +13,7 @@ import { IWorkspaceContextService, IWorkspaceFolder } from 'vs/platform/workspac
 import { IConfigurationResolverService } from 'vs/workbench/services/configurationResolver/common/configurationResolver';
 import { sanitizeProcessEnvironment } from 'vs/base/common/processes';
 import { IShellLaunchConfig, ITerminalBackend, ITerminalEnvironment, TerminalShellType, WindowsShellType } from 'vs/platform/terminal/common/terminal';
-import { IProcessEnvironment, isWindows, language, OperatingSystem } from 'vs/base/common/platform';
+import { IProcessEnvironment, isWindows, isMacintosh, language, OperatingSystem } from 'vs/base/common/platform';
 import { escapeNonWindowsPath, sanitizeCwd } from 'vs/platform/terminal/common/terminalEnvironment';
 import { isString } from 'vs/base/common/types';
 import { IHistoryService } from 'vs/workbench/services/history/common/history';
@@ -269,6 +269,26 @@ export async function createTerminalEnvironment(
 			}
 		}
 
+		// Workaround for https://github.com/microsoft/vscode/issues/204005
+		// We should restore the following environment variables when a user
+		// launches the application using the CLI so that integrated terminal
+		// can still inherit these variables.
+		// We are not bypassing the restrictions implied in https://github.com/electron/electron/pull/40770
+		// since this only affects integrated terminal and not the application itself.
+		if (isMacintosh) {
+			// Restore NODE_OPTIONS if it was set
+			if (env['VSCODE_NODE_OPTIONS']) {
+				env['NODE_OPTIONS'] = env['VSCODE_NODE_OPTIONS'];
+				delete env['VSCODE_NODE_OPTIONS'];
+			}
+
+			// Restore NODE_REPL_EXTERNAL_MODULE if it was set
+			if (env['VSCODE_NODE_REPL_EXTERNAL_MODULE']) {
+				env['NODE_REPL_EXTERNAL_MODULE'] = env['VSCODE_NODE_REPL_EXTERNAL_MODULE'];
+				delete env['VSCODE_NODE_REPL_EXTERNAL_MODULE'];
+			}
+		}
+
 		// Sanitize the environment, removing any undesirable VS Code and Electron environment
 		// variables
 		sanitizeProcessEnvironment(env, 'VSCODE_IPC_HOOK_CLI');