Hi all, in case you're still getting this issue - it's because of Windows Bitlocker pre-encryption.
Even when you're not consciously using Bitlocker the OS will pre-encrypt part of the drive, which stops Proxmox from reading it. Do the following to fix it:
From an admin command prompt in Windows, run: manage-bde -off c:
(replace c: with whichever drive you're concerned with).
The drive will start to decrypt. You can check ongoing status with: manage-bde -status c:
You'll see the status like this:
Once decryption is complete, run a backup in Proxmox of the VM...
We didn't had the problem with upgraded Windows 10 to Windows 11 VMs and after disabling the encryption and taking a backup, everything worked fine with the file restore.