diff --git a/main/src/main/scala/sbt/Defaults.scala b/main/src/main/scala/sbt/Defaults.scala
index 07e22218f..92d02078e 100644
--- a/main/src/main/scala/sbt/Defaults.scala
+++ b/main/src/main/scala/sbt/Defaults.scala
@@ -191,6 +191,7 @@ object Defaults extends BuildCommon with DefExtra {
       apiURL := None,
       releaseNotesURL := None,
       javaHome :== None,
+      forkWorkingDirectory :== None,
       discoveredJavaHomes := CrossJava.discoverJavaHomes,
       javaHomes :== ListMap.empty,
       fullJavaHomes := CrossJava.expandJavaHomes(discoveredJavaHomes.value ++ javaHomes.value),
@@ -1405,6 +1406,8 @@ object Defaults extends BuildCommon with DefExtra {
       )
     )
   }
+
+  /** The forked process inherits sbt's working directory unless `forkWorkingDirectory` is set. */
   def forkOptionsTask: Initialize[Task[ForkOptions]] =
     Def.task {
       val canUseArgumentsFile = sys.props
@@ -1415,7 +1418,7 @@ object Defaults extends BuildCommon with DefExtra {
         outputStrategy = outputStrategy.value,
         // bootJars is empty by default because only jars on the user's classpath should be on the boot classpath
         bootJars = Vector(),
-        workingDirectory = Some(baseDirectory.value),
+        workingDirectory = forkWorkingDirectory.value,
         runJVMOptions = javaOptions.value.toVector,
         connectInput = connectInput.value,
         envVars = envVars.value,
diff --git a/main/src/main/scala/sbt/Keys.scala b/main/src/main/scala/sbt/Keys.scala
index 0f16c5fca..68c64555d 100644
--- a/main/src/main/scala/sbt/Keys.scala
+++ b/main/src/main/scala/sbt/Keys.scala
@@ -354,6 +354,7 @@ object Keys {
 
   val fork = settingKey[Boolean]("If true, forks a new JVM when running.  If false, runs in the same JVM as the build.").withRank(ASetting)
   val forkOptions = taskKey[ForkOptions]("Configures JVM forking.").withRank(DSetting)
+  val forkWorkingDirectory = settingKey[Option[File]]("Working directory of forked processes started by run, test, and console. If None, the forked process inherits the working directory of the sbt process.").withRank(BSetting)
   val outputStrategy = settingKey[Option[sbt.OutputStrategy]]("Selects how to log output when running a main class.").withRank(DSetting)
   val connectInput = settingKey[Boolean]("If true, connects standard input when running a main class forked.").withRank(CSetting)
   val javaHome = settingKey[Option[File]]("Selects the Java installation used for compiling and forking.  If None, uses the Java installation running the build.").withRank(ASetting)
diff --git a/main/src/main/scala/sbt/internal/Compiler.scala b/main/src/main/scala/sbt/internal/Compiler.scala
index 020f9e7bc..49b9b8d08 100644
--- a/main/src/main/scala/sbt/internal/Compiler.scala
+++ b/main/src/main/scala/sbt/internal/Compiler.scala
@@ -621,6 +621,7 @@ object Compiler:
     val termEnv = sys.env.get("TERM").getOrElse("xterm-256color")
     ForkOptions()
       .withConnectInput(true)
+      .withWorkingDirectory((Keys.console / Keys.forkWorkingDirectory).value)
       .withRunJVMOptions(
         jo ++ Vector(
           s"-Dorg.jline.terminal.type=$termEnv",
diff --git a/main/src/main/scala/sbt/internal/server/BuildServerProtocol.scala b/main/src/main/scala/sbt/internal/server/BuildServerProtocol.scala
index 24d43b197..54c489d84 100644
--- a/main/src/main/scala/sbt/internal/server/BuildServerProtocol.scala
+++ b/main/src/main/scala/sbt/internal/server/BuildServerProtocol.scala
@@ -343,7 +343,7 @@ object BuildServerProtocol {
       JavacOptionsItem(target, javacOptions, classpath, classDirectory.toURI)
     },
     bspBuildTargetJVMRunEnvironment := bspInputTask { (_, filter) =>
-      val items = bspBuildTargetJvmEnvironmentItem.result.all(filter).value
+      val items = (run / bspBuildTargetJvmEnvironmentItem).result.all(filter).value
       val successfulItems = anyOrThrow(items)
       val result = JvmRunEnvironmentResult(successfulItems.toVector, None)
       state.value.respondEvent(result)
@@ -354,7 +354,8 @@ object BuildServerProtocol {
       val result = JvmTestEnvironmentResult(successfulItems.toVector, None)
       state.value.respondEvent(result)
     }.evaluated,
-    bspBuildTargetJvmEnvironmentItem := jvmEnvironmentItem().value,
+    bspBuildTargetJvmEnvironmentItem := jvmEnvironmentItem(forkOptions).value,
+    run / bspBuildTargetJvmEnvironmentItem := jvmEnvironmentItem(run / forkOptions).value,
     bspInternalDependencyConfigurations := internalDependencyConfigurationsSetting.value,
     bspScalaTestClassesItem := scalaTestClassesTask.value,
     bspScalaMainClassesItem := scalaMainClassesTask.value,
@@ -793,7 +794,12 @@ object BuildServerProtocol {
       Def.task(taskImpl(workspace, filter))
     }
 
-  private def jvmEnvironmentItem(): Initialize[Task[JvmEnvironmentItem]] = Def.task {
+  private def bspEnvironmentVariables(opts: ForkOptions): Vector[String] =
+    opts.envVars.map { (k, v) => s"$k=$v" }.toVector
+
+  private def jvmEnvironmentItem(
+      forkOptions: Initialize[Task[ForkOptions]]
+  ): Initialize[Task[JvmEnvironmentItem]] = Def.task {
     val target = Keys.bspTargetIdentifier.value
     val converter = fileConverter.value
     val classpath = Keys.fullClasspath.value
@@ -801,16 +807,17 @@ object BuildServerProtocol {
       .map(converter.toPath)
       .map(_.toFile.toURI)
       .toVector
-    val jvmOptions = Keys.javaOptions.value.toVector
-    val baseDir = Keys.baseDirectory.value.getAbsolutePath
-    val env = envVars.value
+    val opts = forkOptions.value
+    val workingDir = opts.workingDirectory
+      .getOrElse(new File(sys.props("user.dir")))
+      .getAbsolutePath
 
     JvmEnvironmentItem(
       target,
       classpath,
-      jvmOptions,
-      baseDir,
-      env
+      opts.runJVMOptions,
+      workingDir,
+      opts.envVars
     )
   }
 
@@ -947,7 +954,8 @@ object BuildServerProtocol {
       val json = jsonParser.parsed
       val runParams = json.flatMap(Converter.fromJson[RunParams]).get
       val defaultClass = Keys.mainClass.value
-      val defaultJvmOptions = Keys.javaOptions.value
+      val defaultOpts = (run / forkOptions).value
+      val defaultEnv = bspEnvironmentVariables(defaultOpts)
 
       val mainClass = runParams.dataKind match {
         case Some("scala-main-class") =>
@@ -959,9 +967,7 @@ object BuildServerProtocol {
                 e.getMessage
               )
             case Success(value) =>
-              value.withEnvironmentVariables(
-                envVars.value.map { (k, v) => s"$k=$v" }.toVector ++ value.environmentVariables
-              )
+              value.withEnvironmentVariables(defaultEnv ++ value.environmentVariables)
           }
 
         case Some(dataKind) =>
@@ -979,8 +985,8 @@ object BuildServerProtocol {
               )
             ),
             runParams.arguments,
-            defaultJvmOptions.toVector,
-            envVars.value.map { (k, v) => s"$k=$v" }.toVector
+            defaultOpts.runJVMOptions,
+            defaultEnv
           )
       }
       runMainClassTask(mainClass, runParams.originId)
@@ -1038,21 +1044,18 @@ object BuildServerProtocol {
     val state = Keys.state.value
     val logger = Keys.streams.value.log
     val classpath = Attributed.data(fullClasspath.value)
-    val forkOpts = ForkOptions(
-      javaHome = javaHome.value,
-      outputStrategy = outputStrategy.value,
-      // bootJars is empty by default because only jars on the user's classpath should be on the boot classpath
-      bootJars = Vector(),
-      workingDirectory = Some(baseDirectory.value),
-      runJVMOptions = mainClass.jvmOptions,
-      connectInput = connectInput.value,
-      envVars = mainClass.environmentVariables
-        .flatMap(_.split("=", 2).toList match {
-          case key :: value :: Nil => Some(key -> value)
-          case _                   => None
-        })
-        .toMap
-    )
+    // connectInput is disabled so non-interactive BSP output is captured as log messages
+    val forkOpts = (run / forkOptions).value
+      .withConnectInput(false)
+      .withRunJVMOptions(mainClass.jvmOptions)
+      .withEnvVars(
+        mainClass.environmentVariables
+          .flatMap(_.split("=", 2).toList match {
+            case key :: value :: Nil => Some(key -> value)
+            case _                   => None
+          })
+          .toMap
+      )
     val runner = new ForkRun(forkOpts)
     val converter = fileConverter.value
     val cp = classpath.map(converter.toPath)
@@ -1122,13 +1125,14 @@ object BuildServerProtocol {
   }
 
   private def scalaMainClassesTask: Initialize[Task[ScalaMainClassesItem]] = Def.task {
-    val jvmOptions = Keys.javaOptions.value.toVector
+    val opts = (run / forkOptions).value
+    val env = bspEnvironmentVariables(opts)
     val mainClasses = Keys.discoveredMainClasses.value.map(
       ScalaMainClass(
         _,
         Vector(),
-        jvmOptions,
-        envVars.value.map { (k, v) => s"$k=$v" }.toVector
+        opts.runJVMOptions,
+        env
       )
     )
     ScalaMainClassesItem(
diff --git a/notes/2.0.0/fork-working-directory.md b/notes/2.0.0/fork-working-directory.md
new file mode 100644
index 000000000..a7b148ce1
--- /dev/null
+++ b/notes/2.0.0/fork-working-directory.md
@@ -0,0 +1,23 @@
+### Forked run and test start in sbt's working directory
+
+Previously, forked `run` and `test` set the forked JVM's working directory to the
+project's `baseDirectory`, while non-forked `run` and `test` executed in the directory
+sbt itself was started from. In a multi-project build, toggling `fork` silently changed
+the directory that relative paths resolved against.
+
+sbt 2.x makes forked `run`, `test`, and `console` inherit sbt's own working directory by
+default, consistent with non-forked execution. A new setting,
+`forkWorkingDirectory: Option[File]`, configures the working directory of forked
+processes. To restore the sbt 1.x behavior:
+
+```scala
+Test / forkWorkingDirectory := Some(baseDirectory.value)
+run / forkWorkingDirectory := Some(baseDirectory.value)
+```
+
+The BSP `buildTarget/jvmRunEnvironment` and `buildTarget/jvmTestEnvironment` responses
+report the same working directory so that IDEs follow the same contract.
+
+This addresses [#1032][i1032].
+
+[i1032]: https://github.com/sbt/sbt/issues/1032
diff --git a/notes/2.0.0/migration.md b/notes/2.0.0/migration.md
index 18dd31853..92acc32ec 100644
--- a/notes/2.0.0/migration.md
+++ b/notes/2.0.0/migration.md
@@ -1,5 +1,15 @@
 
 
+## Forked run/test working directory
+
+Forked `run` and `test` no longer run in the project's `baseDirectory`; they inherit
+sbt's working directory, matching non-forked behavior. To restore the sbt 1.x behavior:
+
+```scala
+run / forkWorkingDirectory := Some(baseDirectory.value)
+Test / forkWorkingDirectory := Some(baseDirectory.value)
+```
+
 ## files extension on Classpath
 
 ```scala
diff --git a/sbt-app/src/sbt-test/run/fork/test b/sbt-app/src/sbt-test/run/fork/test
index 773af0776..a6f9aee70 100644
--- a/sbt-app/src/sbt-test/run/fork/test
+++ b/sbt-app/src/sbt-test/run/fork/test
@@ -1,18 +1,29 @@
-> run fork
+# non-forked run executes in sbt's working directory
+> run
 $ exists flag
 $ delete flag
 
-$ mkdir forked
+# forked run inherits sbt's working directory by default,
+# even when run / baseDirectory points elsewhere (#1032)
 > set fork := true
 > set run / baseDirectory := baseDirectory(_ / "forked").value
+> run
+$ exists flag
+$ absent forked/flag
+$ delete flag
 
-> run forked
+# forkWorkingDirectory restores forking in a specific directory
+> session clear
+> set fork := true
+> set run / forkWorkingDirectory := Some(baseDirectory.value / "forked")
+$ mkdir forked
+> run
 $ exists forked/flag
 $ absent flag
 $ delete forked/flag
 
 > set envVars += ("flag.name" -> "env.flag")
-> run forked
+> run
 $ exists forked/env.flag
 $ absent flag
 $ absent forked/flag
diff --git a/sbt-app/src/sbt-test/tests/fork-working-directory/build.sbt b/sbt-app/src/sbt-test/tests/fork-working-directory/build.sbt
new file mode 100644
index 000000000..dbf929bb1
--- /dev/null
+++ b/sbt-app/src/sbt-test/tests/fork-working-directory/build.sbt
@@ -0,0 +1,11 @@
+val scalatest = "org.scalatest" %% "scalatest" % "3.2.19"
+
+ThisBuild / scalaVersion := "3.8.4"
+
+lazy val root = (project in file("."))
+
+lazy val sub = project
+  .settings(
+    Test / fork := true,
+    libraryDependencies += scalatest % Test,
+  )
diff --git a/sbt-app/src/sbt-test/tests/fork-working-directory/changes/forkdir.sbt b/sbt-app/src/sbt-test/tests/fork-working-directory/changes/forkdir.sbt
new file mode 100644
index 000000000..2e431967a
--- /dev/null
+++ b/sbt-app/src/sbt-test/tests/fork-working-directory/changes/forkdir.sbt
@@ -0,0 +1 @@
+Test / forkWorkingDirectory := Some(baseDirectory.value)
diff --git a/sbt-app/src/sbt-test/tests/fork-working-directory/sub/src/test/scala/CwdSpec.scala b/sbt-app/src/sbt-test/tests/fork-working-directory/sub/src/test/scala/CwdSpec.scala
new file mode 100644
index 000000000..79887d224
--- /dev/null
+++ b/sbt-app/src/sbt-test/tests/fork-working-directory/sub/src/test/scala/CwdSpec.scala
@@ -0,0 +1,8 @@
+import org.scalatest.funsuite.AnyFunSuite
+
+class CwdSpec extends AnyFunSuite {
+  test("create marker in the forked working directory") {
+    val marker = new java.io.File("cwd-marker").getAbsoluteFile
+    assert(marker.createNewFile() || marker.exists())
+  }
+}
diff --git a/sbt-app/src/sbt-test/tests/fork-working-directory/test b/sbt-app/src/sbt-test/tests/fork-working-directory/test
new file mode 100644
index 000000000..142dc92ce
--- /dev/null
+++ b/sbt-app/src/sbt-test/tests/fork-working-directory/test
@@ -0,0 +1,12 @@
+# a forked test's working directory is sbt's working directory by default (#1032)
+> sub/testFull
+$ exists cwd-marker
+$ absent sub/cwd-marker
+$ delete cwd-marker
+
+# Test / forkWorkingDirectory restores forking in the project directory
+$ copy-file changes/forkdir.sbt sub/forkdir.sbt
+> reload
+> sub/testFull
+$ exists sub/cwd-marker
+$ absent cwd-marker
diff --git a/server-test/src/server-test/buildserver/build.sbt b/server-test/src/server-test/buildserver/build.sbt
index 62465c8e5..23f7b3803 100644
--- a/server-test/src/server-test/buildserver/build.sbt
+++ b/server-test/src/server-test/buildserver/build.sbt
@@ -9,6 +9,7 @@ lazy val runAndTest = project.in(file("run-and-test"))
     libraryDependencies += "org.scalatest" %% "scalatest" % "3.0.8" % "test",
     Compile / javaOptions := Vector("Xmx256M"),
     Compile / envVars := Map("KEY" -> "VALUE"),
+    run / forkWorkingDirectory := Some(baseDirectory.value),
 
     Test / javaOptions := Vector("Xmx512M"),
     Test / envVars := Map("KEY_TEST" -> "VALUE_TEST"),
diff --git a/server-test/src/test/scala/testpkg/BuildServerTest.scala b/server-test/src/test/scala/testpkg/BuildServerTest.scala
index 679f83f0a..8624d2095 100644
--- a/server-test/src/test/scala/testpkg/BuildServerTest.scala
+++ b/server-test/src/test/scala/testpkg/BuildServerTest.scala
@@ -472,8 +472,12 @@ class BuildServerTest extends AbstractServerTest {
     val id = sendRequest("buildTarget/scalaMainClasses", ScalaMainClassesParams(targets, None))
     val res =
       svr.session.waitForResultInResponseMsg[ScalaMainClassesResult](30.seconds, id).get
-    val classes = res.items.flatMap(_.classes.map(_.`class`))
-    assert(classes.contains("main.Main"))
+    val mainClasses = res.items.flatMap(_.classes)
+    assert(mainClasses.map(_.`class`).contains("main.Main"))
+    // JVM options and environment are derived from run / forkOptions
+    val main = mainClasses.find(_.`class` == "main.Main").get
+    assert(main.jvmOptions.contains("Xmx256M"))
+    assert(main.environmentVariables.contains("KEY=VALUE"))
   }
 
   test("buildTarget/run") {
@@ -509,7 +513,8 @@ class BuildServerTest extends AbstractServerTest {
     )
     assert(item.jvmOptions.contains("Xmx256M"))
     assert(item.environmentVariables == Map("KEY" -> "VALUE"))
-    assert(item.workingDirectory.contains("/buildserver/run-and-test"))
+    // run / forkWorkingDirectory is honored for the run environment
+    assert(item.workingDirectory.endsWith("/run-and-test"))
   }
 
   test("buildTarget/jvmTestEnvironment") {
@@ -529,6 +534,9 @@ class BuildServerTest extends AbstractServerTest {
     )
     assert(item.jvmOptions.contains("Xmx512M"))
     assert(item.environmentVariables == Map("KEY_TEST" -> "VALUE_TEST"))
+    // with no Test / forkWorkingDirectory, the test environment inherits sbt's working directory
+    assert(item.workingDirectory.endsWith("/buildserver"))
+    assert(!item.workingDirectory.contains("run-and-test"))
   }
 
   test("buildTarget/scalaTestClasses") {