diff --git a/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts b/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts
index 68dca194702..4776ccd2599 100644
--- a/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts
+++ b/extensions/markdown-language-features/src/languageFeatures/copyFiles/pasteUrlProvider.ts
@@ -124,6 +124,8 @@ export async function shouldInsertMarkdownLinkByDefault(
 	}
 }
 
+const textTokenTypes = new Set(['paragraph_open', 'inline', 'heading_open', 'ordered_list_open', 'bullet_list_open', 'list_item_open', 'blockquote_open']);
+
 async function shouldSmartPasteForSelection(
 	parser: IMdParser,
 	document: ITextDocument,
@@ -150,9 +152,29 @@ async function shouldSmartPasteForSelection(
 	if (token.isCancellationRequested) {
 		return false;
 	}
-	for (const token of tokens) {
-		if (token.map && token.map[0] <= selectedRange.start.line && token.map[1] > selectedRange.start.line) {
-			if (!['paragraph_open', 'inline', 'heading_open', 'ordered_list_open', 'bullet_list_open', 'list_item_open', 'blockquote_open'].includes(token.type)) {
+
+	for (let i = 0; i < tokens.length; i++) {
+		const token = tokens[i];
+		if (!token.map) {
+			continue;
+		}
+		if (token.map[0] <= selectedRange.start.line && token.map[1] > selectedRange.start.line) {
+			if (!textTokenTypes.has(token.type)) {
+				return false;
+			}
+		}
+
+		// Special case for html such as:
+		//
+		// <b>
+		// |
+		// </b>
+		//
+		// In this case pasting will cause the html block to be created even though the cursor is not currently inside a block
+		if (token.type === 'html_block' && token.map[1] === selectedRange.start.line) {
+			const nextToken = tokens.at(i + 1);
+			// The next token does not need to be a html_block, but it must be on the next line
+			if (nextToken?.map?.[0] === selectedRange.end.line + 1) {
 				return false;
 			}
 		}
diff --git a/extensions/markdown-language-features/src/test/markdownLink.test.ts b/extensions/markdown-language-features/src/test/pasteUrl.test.ts
similarity index 92%
rename from extensions/markdown-language-features/src/test/markdownLink.test.ts
rename to extensions/markdown-language-features/src/test/pasteUrl.test.ts
index 7b5849e47e2..4835af35e59 100644
--- a/extensions/markdown-language-features/src/test/markdownLink.test.ts
+++ b/extensions/markdown-language-features/src/test/pasteUrl.test.ts
@@ -203,6 +203,23 @@ suite('createEditAddingLinksForUriList', () => {
 				false);
 		});
 
+		test('Smart should be disabled in html blocks where paste creates the block', async () => {
+			assert.strictEqual(
+				await shouldInsertMarkdownLinkByDefault(createNewMarkdownEngine(), makeTestDoc('<p>\n\n</p>'), PasteUrlAsMarkdownLink.Smart, [new vscode.Range(1, 0, 1, 0)], noopToken),
+				false,
+				'Between two html tags should be treated as html block');
+
+			assert.strictEqual(
+				await shouldInsertMarkdownLinkByDefault(createNewMarkdownEngine(), makeTestDoc('<p>\n\ntext'), PasteUrlAsMarkdownLink.Smart, [new vscode.Range(1, 0, 1, 0)], noopToken),
+				false,
+				'Between opening html tag and text should be treated as html block');
+
+			assert.strictEqual(
+				await shouldInsertMarkdownLinkByDefault(createNewMarkdownEngine(), makeTestDoc('<p>\n\n\n</p>'), PasteUrlAsMarkdownLink.Smart, [new vscode.Range(1, 0, 1, 0)], noopToken),
+				true,
+				'Extra new line after paste should not be treated as html block');
+		});
+
 		test('Smart should be disabled in Markdown links', async () => {
 			assert.strictEqual(
 				await shouldInsertMarkdownLinkByDefault(createNewMarkdownEngine(), makeTestDoc('[a](bcdef)'), PasteUrlAsMarkdownLink.Smart, [new vscode.Range(0, 4, 0, 6)], noopToken),
@@ -266,7 +283,5 @@ suite('createEditAddingLinksForUriList', () => {
 				await shouldInsertMarkdownLinkByDefault(createNewMarkdownEngine(), makeTestDoc('   \r\n\r\n'), PasteUrlAsMarkdownLink.SmartWithSelection, [new vscode.Range(0, 0, 0, 7)], noopToken),
 				false);
 		});
-
-
 	});
 });