The VSCode Context MCP allows AI models to access detailed VSCode environment information, including active files, open tabs, workspace diagnostics, and terminal output. It also supports filesystem operations like reading, writing, editing, creating, and moving files or directories. Additionally, it enables running shell commands within a controlled environment. This functionality helps AI assistants to provide precise, context-aware coding help, debugging assistance, file management, and more, making it a comprehensive tool for integrating AI with the VSCode development environment.