To add to what sibling commenters have said, you can also configure this extension to use a specific Neovim binary on your system, and you can also configure it

To add to what sibling commenters have said, you can also configure this extension to use a specific Neovim binary on your system, and you can also configure it to use/load the same Neovim config you use when you use Neovim in the terminal. That's what I do. It's really the better (Neo)?vim extension in my opinion, but it has a lot less installs than the other popular extension, called just "Vim" (6.656M installs vs. 400K installs) that extension AFAIK actually emulates Vim in JavaScript, I used it for about a year in 2018, before the other extension "VSCode Neovim" was released in 2019 and remember not having a good experience using it then (to compare, the extension "Vim" was released in Nov. 2015).