Steps to Reproduce:
\\wsl$\Ubuntu-20.04 remote path) using File > Open folder...Remote-WSL: Reopen Folder in WSL... command
Does this issue occur when all extensions are disabled?: Yes (apart from WSL Remote extension)
This is working correctly with version 1.50.1.

(Experimental duplicate detection)
Thanks for submitting this issue. Please also check if it is already covered by an existing one, like:
I'm not sure, if it's the same problem but if I try to launch VSCode from the wsl console nothing happens. So I open it up manually Remote-WSL: Reopen/Open Folder in WSL and the VSCode Server crashes immediately.
"VS Code Server for WSL closed unexpectedly."
"WSL Daemon exited with code 0"
Version: 1.51.0
OS: Windows_NT x64 10.0.19042
WSL version: 4.19.104-microsoft-standard Debian
Works with this Version:
Version: 1.50.1 (system setup)
Pushed a fix for Reopen Folder in WSL in 0.51.2 released yesterday. Can you test if that solved your issue?
This is working as expected now, thank you!
Marking as verified according to @abarani comment.