diff --git a/packages/app/e2e/terminal/terminal-input.spec.ts b/packages/app/e2e/terminal/terminal-input.spec.ts
new file mode 100644
index 000000000..b133365fb
--- /dev/null
+++ b/packages/app/e2e/terminal/terminal-input.spec.ts
@@ -0,0 +1,21 @@
+import { runTerminal, waitTerminalFocusIdle } from "../actions"
+import { test } from "../fixtures"
+import { terminalSelector } from "../selectors"
+import { terminalToggleKey } from "../utils"
+
+// Regression coverage for #696: a returns-value inversion in the Ghostty
+// custom key handler swallowed every keystroke before it could reach the
+// PTY. The compile-time defense is the typed wrapper in
+// `@/utils/terminal-key-handler`; this spec keeps the full keyboard → PTY →
+// render path under test so a future break in any layer surfaces here.
+test("terminal forwards typed characters to the underlying PTY", async ({ page, gotoSession }) => {
+  await gotoSession()
+
+  const terminal = page.locator(terminalSelector).first()
+  const visible = await terminal.isVisible().catch(() => false)
+  if (!visible) await page.keyboard.press(terminalToggleKey)
+  await waitTerminalFocusIdle(page, { term: terminal })
+
+  const token = `E2E_INPUT_${Date.now()}`
+  await runTerminal(page, { cmd: `echo ${token}`, token })
+})
diff --git a/packages/app/src/components/terminal.tsx b/packages/app/src/components/terminal.tsx
index 0cbc9cd17..8654a503f 100644
--- a/packages/app/src/components/terminal.tsx
+++ b/packages/app/src/components/terminal.tsx
@@ -16,6 +16,7 @@ import { isTerminalGoneError } from "@/context/terminal"
 import type { RuntimePTY, TerminalSnapshot, TerminalTab } from "@/context/terminal-types"
 import { terminalAttr, terminalProbe } from "@/testing/terminal"
 import { disposeIfDisposable, getHoveredLinkText, setOptionIfSupported } from "@/utils/runtime-adapters"
+import { attachKeyHandler } from "@/utils/terminal-key-handler"
 import { terminalWebSocketURL } from "@/utils/terminal-websocket-url"
 import { terminalWriter } from "@/utils/terminal-writer"
 
@@ -392,12 +393,12 @@ export const Terminal = (props: TerminalProps) => {
         }),
       )
 
-      t.attachCustomKeyEventHandler((event) => {
+      attachKeyHandler(t, (event) => {
         const key = event.key.toLowerCase()
 
         if (event.ctrlKey && event.shiftKey && !event.metaKey && key === "c") {
           document.execCommand("copy")
-          return true
+          return "block"
         }
 
         // Dispatch terminal toggles ourselves because Ghostty focus can swallow
@@ -405,12 +406,14 @@ export const Terminal = (props: TerminalProps) => {
         const config = settings.keybinds.get(TOGGLE_TERMINAL_ID) ?? DEFAULT_TOGGLE_TERMINAL_KEYBIND
         const keybinds = parseKeybind(config)
 
-        if (!matchKeybind(keybinds, event)) return true
+        if (matchKeybind(keybinds, event)) {
+          event.preventDefault()
+          event.stopPropagation()
+          queueMicrotask(() => command.trigger(TOGGLE_TERMINAL_ID, "keybind"))
+          return "block"
+        }
 
-        event.preventDefault()
-        event.stopPropagation()
-        queueMicrotask(() => command.trigger(TOGGLE_TERMINAL_ID, "keybind"))
-        return false
+        return "passthrough"
       })
 
       const fit = new mod.FitAddon()
diff --git a/packages/app/src/utils/terminal-key-handler.ts b/packages/app/src/utils/terminal-key-handler.ts
new file mode 100644
index 000000000..1f18357f4
--- /dev/null
+++ b/packages/app/src/utils/terminal-key-handler.ts
@@ -0,0 +1,11 @@
+import type { Terminal as Term } from "ghostty-web"
+
+export type KeyHandlerResult = "block" | "passthrough"
+
+// Ghostty's customKeyEventHandler returns `true` to BLOCK default handling —
+// opposite of xterm.js, which uses `true` to mean "continue normal processing".
+// This wrapper exposes an enum so callers cannot accidentally invert the
+// boolean and silently swallow every keystroke (see issue #696).
+export const attachKeyHandler = (term: Term, handler: (event: KeyboardEvent) => KeyHandlerResult) => {
+  term.attachCustomKeyEventHandler((event) => handler(event) === "block")
+}