diff --git a/Sources/ContentView.swift b/Sources/ContentView.swift
index 9065d5971758..43fb94e0b954 100644
--- a/Sources/ContentView.swift
+++ b/Sources/ContentView.swift
@@ -10855,19 +10855,42 @@ private struct SidebarEmptyArea: View {
 enum SidebarPathFormatter {
     static let homeDirectoryPath: String = FileManager.default.homeDirectoryForCurrentUser.path
 
+    /// Maximum number of path segments shown before adding a leading ellipsis.
+    /// e.g. `~/a/b/c/d` → `…/b/c/d` when maxSegments == 3.
+    static let maxDisplaySegments: Int = 3
+
     static func shortenedPath(
         _ path: String,
         homeDirectoryPath: String = Self.homeDirectoryPath
     ) -> String {
         let trimmed = path.trimmingCharacters(in: .whitespacesAndNewlines)
         guard !trimmed.isEmpty else { return path }
+
+        // Replace home directory prefix with ~
+        let tildeReplaced: String
         if trimmed == homeDirectoryPath {
             return "~"
-        }
-        if trimmed.hasPrefix(homeDirectoryPath + "/") {
-            return "~" + trimmed.dropFirst(homeDirectoryPath.count)
-        }
-        return trimmed
+        } else if trimmed.hasPrefix(homeDirectoryPath + "/") {
+            tildeReplaced = "~" + trimmed.dropFirst(homeDirectoryPath.count)
+        } else {
+            tildeReplaced = trimmed
+        }
+
+        // Apply smart truncation: keep only the last maxDisplaySegments segments
+        // so paths with a long common prefix remain distinguishable in the sidebar.
+        // e.g. `~/Desktop/YOKE/Claude Code/Projects/Athlete Merch/nilclub`
+        //   → `…/Projects/Athlete Merch/nilclub`
+        let segments = tildeReplaced.split(separator: "/", omittingEmptySubsequences: false)
+        // For a tilde-replaced path like `~/a/b/c`, split on "/" yields
+        // ["~", "a", "b", "c"]. The tilde token is always a single leading segment.
+        // For an absolute path like `/tmp/a/b`, split yields ["", "tmp", "a", "b"].
+        // We only truncate when there are strictly more segments than allowed.
+        let effectiveMax = maxDisplaySegments + 1 // +1 for the leading "~" or "" token
+        guard segments.count > effectiveMax else {
+            return tildeReplaced
+        }
+        let tail = segments.suffix(maxDisplaySegments).joined(separator: "/")
+        return "…/" + tail
     }
 }
 
diff --git a/cmuxTests/GhosttyConfigTests.swift b/cmuxTests/GhosttyConfigTests.swift
index d7820ce35ed1..88ff90f6b0e8 100644
--- a/cmuxTests/GhosttyConfigTests.swift
+++ b/cmuxTests/GhosttyConfigTests.swift
@@ -38,6 +38,85 @@ final class SidebarPathFormatterTests: XCTestCase {
             "/tmp/cmux"
         )
     }
+
+    // MARK: - Smart truncation (issue #2061)
+
+    func testShortenedPathKeepsThreeSegmentsUnchanged() {
+        // ~/a/b/c — exactly maxDisplaySegments; no ellipsis added
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/Users/example/a/b/c",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "~/a/b/c"
+        )
+    }
+
+    func testShortenedPathTruncatesLongHomePath() {
+        // ~/Desktop/YOKE/Claude Code/Projects/Athlete Merch/nilclub → …/Projects/Athlete Merch/nilclub
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/Users/example/Desktop/YOKE/Claude Code/Projects/Athlete Merch/nilclub",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "…/Projects/Athlete Merch/nilclub"
+        )
+    }
+
+    func testShortenedPathTruncatesFourSegmentHomePath() {
+        // ~/a/b/c/d — one segment over limit → …/b/c/d
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/Users/example/a/b/c/d",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "…/b/c/d"
+        )
+    }
+
+    func testShortenedPathLeavesShortHomePathUnchanged() {
+        // ~/projects/cmux — only 2 segments; no ellipsis
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/Users/example/projects/cmux",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "~/projects/cmux"
+        )
+    }
+
+    func testShortenedPathTruncatesLongAbsolutePath() {
+        // /a/b/c/d/e — 5 segments (no home match) → …/c/d/e
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/a/b/c/d/e",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "…/c/d/e"
+        )
+    }
+
+    func testShortenedPathLeavesShortAbsolutePathUnchanged() {
+        // /tmp/a/b — exactly 3 segments; no truncation
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/tmp/a/b",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "/tmp/a/b"
+        )
+    }
+
+    func testShortenedPathTruncatesLongAbsolutePathBeyondThree() {
+        // /tmp/a/b/c — 4 segments; triggers truncation → …/a/b/c
+        XCTAssertEqual(
+            SidebarPathFormatter.shortenedPath(
+                "/tmp/a/b/c",
+                homeDirectoryPath: "/Users/example"
+            ),
+            "…/a/b/c"
+        )
+    }
 }
 
 final class GhosttyConfigTests: XCTestCase {