VS Code version: Code - OSS 1.47.3 (91899dc, 2020-07-30T16:19:47.070Z)
OS version: Linux x64 5.7.11-arch1-1

Steps to Reproduce:

1. Compile the minimal reproduction program:

#include <curses.h>
int main() {
    initscr();
    start_color();
    if (has_colors() == TRUE && can_change_color() == TRUE) {
        init_color(1, 0, 0, 1000); // redefine red to blue
        init_pair(1, 1, 0); // fg=blue, bg=black
        attron(COLOR_PAIR(1));
        printw("Hello, world!"); // should be blue
        attroff(COLOR_PAIR(1));
        refresh();
        getch();
    }
    endwin();
    return 0;
}

gcc repro.c -lncurses -o repro.out
This program uses Ncurses to redefine the default terminal red color to blue and prints a string with the new color, only if the terminal (as reported by Ncurses) supports colors and redefining colors.

2. Run repro.out in an external terminal. The text should be blue (assuming your terminal supports colors and redefining them).
3. Run repro.out in the VSCode integrated terminal. The text will be red (bug).

From the integrated terminal:

echo $TERM
> xterm-256color

Does this issue occur when all extensions are disabled?: Yes