This is because when you capture the desktop output, you get it RAW from the GPU, regardless of how many applications are capturing it.
| - Rendered Frame
\ - DXGI DD Captured Frame
| - Looking Glass -> Shared Memory -> LG Client
\ - Lossless Scaling -> Re-display on the guest
It’s impossible for LG to be part of the Lossless Scaling pipeline, nor would you want to as the bandwidth hit here would be huge.
If this were to be done properly, it needs to be done in the LG client.
Edit: Please be aware that “lossless scaling” is not FSR, FSR is up scaling and as such attempting to recover/alter the image to make it appear at a higher resolution then it was.
LG already supports lossless scaling, it has done so since it’s first realease. It’s called “Integer Scaling”.
How so? If the game has been “remastered” and is rendering at 2x pixel size or something, you can enable the LG downscale filter to bring it back down to the original size, then pass it through FSR to properly upscale it.
We have made sure that FSR is usable and useful on all titles.
For example, here is Starcraft 1 (older screenshots when demoing FSR, but you can see the results)
Set SD Graphics Filter to Sharp to disable SC’s own upscaling method.
Find the right value for the downscaler (2.5 in my instance)

Before
After
For modern titles, set the Game resolution to something low, and turn on FSR, that’s it. Don’t downscale in the game, ensure the actual game resolution being fed to LG is the original untouched lower resolution.
BF5 @ 1024x768 Without FSR
BF5 @ 1024x768 With FSR
Obviously an extreme example, but you get the point.