diff --git a/builtin/reset.c b/builtin/reset.c
index 27aea647499e91..9b9a3019cd6ea9 100644
--- a/builtin/reset.c
+++ b/builtin/reset.c
@@ -37,6 +37,8 @@
 #include "add-interactive.h"
 #include "strbuf.h"
 #include "quote.h"
+#include "dir.h"
+#include "entry.h"
 
 #define REFRESH_INDEX_DELAY_WARNING_IN_MS (2 * 1000)
 
@@ -157,9 +159,47 @@ static void update_index_from_diff(struct diff_queue_struct *q,
 
 	for (i = 0; i < q->nr; i++) {
 		int pos;
+		int respect_skip_worktree = 1;
 		struct diff_filespec *one = q->queue[i]->one;
+		struct diff_filespec *two = q->queue[i]->two;
 		int is_in_reset_tree = one->mode && !is_null_oid(&one->oid);
+		int is_missing = !(one->mode && !is_null_oid(&one->oid));
+		int was_missing = !two->mode && is_null_oid(&two->oid);
 		struct cache_entry *ce;
+		struct cache_entry *ceBefore;
+		struct checkout state = CHECKOUT_INIT;
+
+		/*
+		 * When using the virtual filesystem feature, the cache entries that are
+		 * added here will not have the skip-worktree bit set.
+		 *
+		 * Without this code there is data that is lost because the files that
+		 * would normally be in the working directory are not there and show as
+		 * deleted for the next status or in the case of added files just disappear.
+		 * We need to create the previous version of the files in the working
+		 * directory so that they will have the right content and the next
+		 * status call will show modified or untracked files correctly.
+		 */
+		if (core_virtualfilesystem && !file_exists(two->path))
+		{
+			pos = index_name_pos(&the_index, two->path, strlen(two->path));
+			if ((pos >= 0 && ce_skip_worktree(the_index.cache[pos])) &&
+			    (is_missing || !was_missing))
+			{
+				state.force = 1;
+				state.refresh_cache = 1;
+				state.istate = &the_index;
+				ceBefore = make_cache_entry(&the_index, two->mode,
+							    &two->oid, two->path,
+							    0, 0);
+				if (!ceBefore)
+					die(_("make_cache_entry failed for path '%s'"),
+						two->path);
+
+				checkout_entry(ceBefore, &state, NULL, NULL);
+				respect_skip_worktree = 0;
+			}
+		}
 
 		if (!is_in_reset_tree && !intent_to_add) {
 			remove_file_from_index(&the_index, one->path);
@@ -178,8 +218,14 @@ static void update_index_from_diff(struct diff_queue_struct *q,
 		 * to properly construct the reset sparse directory.
 		 */
 		pos = index_name_pos(&the_index, one->path, strlen(one->path));
-		if ((pos >= 0 && ce_skip_worktree(the_index.cache[pos])) ||
-		    (pos < 0 && !path_in_sparse_checkout(one->path, &the_index)))
+
+		/*
+		 * Do not add the SKIP_WORKTREE bit back if we populated the
+		 * file on purpose in a virtual filesystem scenario.
+		 */
+		if (respect_skip_worktree &&
+		    ((pos >= 0 && ce_skip_worktree(the_index.cache[pos])) ||
+		     (pos < 0 && !path_in_sparse_checkout(one->path, &the_index))))
 			ce->ce_flags |= CE_SKIP_WORKTREE;
 
 		if (!ce)