It looks like layer 0 has reduced transparency.
Screenshot 1 is the smart object from both layers?
2 is where you started before the smart object?
3 is when you double click to edit the smart object?
Just trying to get a clear picture of what is happening. I haven't run into this problem.
I just noticed your reply and think it went like this:
Screenshot 1 is what happend after i loaded a .jpg file and converted it to a smart object.
Screenshot 2 is where I pasted another copy of the original image in a new layer on top of layer 0.
Screenshot 3 is the same layer as shown in screenshot 2 but after converting it to a smart object.
Gotcha. This is very strange behavior and I can't reproduce it. From what you have shared, it's just a jpg that you have converted to a smart object. However - it doesn't look like just a jpg. In Screenshot #2, the background copy layer is weird - it's not a nice rectangle as jpgs are supposed to be and it has transparency around the edges.
My question is - is this only happening with this file or with others as well?