diff --git a/src/cascadia/LocalTests_TerminalApp/SettingsTests.cpp b/src/cascadia/LocalTests_TerminalApp/SettingsTests.cpp
index 9848044b25..a4446f984e 100644
--- a/src/cascadia/LocalTests_TerminalApp/SettingsTests.cpp
+++ b/src/cascadia/LocalTests_TerminalApp/SettingsTests.cpp
@@ -52,6 +52,9 @@ namespace TerminalAppLocalTests
 
         TEST_METHOD(TestLayerGlobalsOnRoot);
 
+        TEST_METHOD(TestProfileIconWithEnvVar);
+        TEST_METHOD(TestProfileBackgroundImageWithEnvVar);
+
         TEST_CLASS_SETUP(ClassSetup)
         {
             InitializeJsonReader();
@@ -1366,4 +1369,49 @@ namespace TerminalAppLocalTests
             VERIFY_ARE_EQUAL(guid3, settings._globals._defaultProfile);
         }
     }
+    void SettingsTests::TestProfileIconWithEnvVar()
+    {
+        const auto expectedPath = wil::ExpandEnvironmentStringsW<std::wstring>(L"%WINDIR%\\System32\\x_80.png");
+
+        const std::string settingsJson{ R"(
+        {
+            "profiles": [
+                {
+                    "name": "profile0",
+                    "icon": "%WINDIR%\\System32\\x_80.png"
+                }
+            ]
+        })" };
+
+        VerifyParseSucceeded(settingsJson);
+        CascadiaSettings settings{};
+        settings._ParseJsonString(settingsJson, false);
+        settings.LayerJson(settings._userSettings);
+        VERIFY_IS_FALSE(settings._profiles.empty(), 0);
+        VERIFY_ARE_EQUAL(expectedPath, settings._profiles[0].GetExpandedIconPath());
+    }
+    void SettingsTests::TestProfileBackgroundImageWithEnvVar()
+    {
+        const auto expectedPath = wil::ExpandEnvironmentStringsW<std::wstring>(L"%WINDIR%\\System32\\x_80.png");
+
+        const std::string settingsJson{ R"(
+        {
+            "profiles": [
+                {
+                    "name": "profile0",
+                    "backgroundImage": "%WINDIR%\\System32\\x_80.png"
+                }
+            ]
+        })" };
+
+        VerifyParseSucceeded(settingsJson);
+        CascadiaSettings settings{};
+        settings._ParseJsonString(settingsJson, false);
+        settings.LayerJson(settings._userSettings);
+        VERIFY_IS_FALSE(settings._profiles.empty(), 0);
+
+        GlobalAppSettings globalSettings{};
+        auto terminalSettings = settings._profiles[0].CreateTerminalSettings(globalSettings.GetColorSchemes());
+        VERIFY_ARE_EQUAL(expectedPath, terminalSettings.BackgroundImage());
+    }
 }
diff --git a/src/cascadia/TerminalApp/Profile.cpp b/src/cascadia/TerminalApp/Profile.cpp
index b0bf89e3fa..70165a87c5 100644
--- a/src/cascadia/TerminalApp/Profile.cpp
+++ b/src/cascadia/TerminalApp/Profile.cpp
@@ -214,9 +214,9 @@ TerminalSettings Profile::CreateTerminalSettings(const std::unordered_map<std::w
         terminalSettings.ScrollState(result);
     }
 
-    if (_backgroundImage)
+    if (HasBackgroundImage())
     {
-        terminalSettings.BackgroundImage(_backgroundImage.value());
+        terminalSettings.BackgroundImage(GetExpandedBackgroundImagePath().c_str());
     }
 
     if (_backgroundImageOpacity)
@@ -765,6 +765,11 @@ bool Profile::HasIcon() const noexcept
     return _icon.has_value() && !_icon.value().empty();
 }
 
+bool Profile::HasBackgroundImage() const noexcept
+{
+    return _backgroundImage.has_value() && !_backgroundImage.value().empty();
+}
+
 // Method Description
 // - Sets this profile's tab title.
 // Arguments:
@@ -800,6 +805,23 @@ winrt::hstring Profile::GetExpandedIconPath() const
     return envExpandedPath;
 }
 
+// Method Description:
+// - Returns this profile's background image path, if one is set, expanding
+//   any environment variables in the path, if there are any.
+// Return Value:
+// - This profile's expanded background image path / the empty string.
+winrt::hstring Profile::GetExpandedBackgroundImagePath() const
+{
+    winrt::hstring result{};
+
+    if (HasBackgroundImage())
+    {
+        result = wil::ExpandEnvironmentStringsW<std::wstring>(_backgroundImage.value().data());
+    }
+
+    return result;
+}
+
 // Method Description:
 // - Returns the name of this profile.
 // Arguments:
diff --git a/src/cascadia/TerminalApp/Profile.h b/src/cascadia/TerminalApp/Profile.h
index 26e488b56f..7b221a4fca 100644
--- a/src/cascadia/TerminalApp/Profile.h
+++ b/src/cascadia/TerminalApp/Profile.h
@@ -82,6 +82,9 @@ public:
     winrt::hstring GetExpandedIconPath() const;
     void SetIconPath(std::wstring_view path);
 
+    bool HasBackgroundImage() const noexcept;
+    winrt::hstring GetExpandedBackgroundImagePath() const;
+
     bool GetCloseOnExit() const noexcept;
     bool IsHidden() const noexcept;
 
diff --git a/src/inc/LibraryIncludes.h b/src/inc/LibraryIncludes.h
index 91308664a0..d45d42bdac 100644
--- a/src/inc/LibraryIncludes.h
+++ b/src/inc/LibraryIncludes.h
@@ -54,6 +54,7 @@
 #include <wil/stl.h>
 #include <wil/com.h>
 #include <wil/filesystem.h>
+#include <wil/win32_helpers.h>
 
 // GSL
 // Block GSL Multi Span include because it both has C++17 deprecated iterators