diff --git a/mercurial/exchange.py b/mercurial/exchange.py
--- a/mercurial/exchange.py
+++ b/mercurial/exchange.py
@@ -7,7 +7,7 @@
 
 from i18n import _
 from node import hex, nullid
-import errno
+import errno, urllib
 import util, scmutil, changegroup, base85
 import discovery, phases, obsolete, bookmarks, bundle2
 
@@ -207,7 +207,9 @@ def _pushbundle2(pushop):
     The only currently supported type of data is changegroup but this will
     evolve in the future."""
     # Send known head to the server for race detection.
-    bundler = bundle2.bundle20(pushop.ui)
+    capsblob = urllib.unquote(pushop.remote.capable('bundle2'))
+    caps = bundle2.decodecaps(capsblob)
+    bundler = bundle2.bundle20(pushop.ui, caps)
     bundler.addpart(bundle2.bundlepart('replycaps'))
     if not pushop.force:
         part = bundle2.bundlepart('CHECK:HEADS', data=iter(pushop.remoteheads))
diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -6,6 +6,7 @@
 # GNU General Public License version 2 or any later version.
 from node import hex, nullid, short
 from i18n import _
+import urllib
 import peer, changegroup, subrepo, pushkey, obsolete, repoview
 import changelog, dirstate, filelog, manifest, context, bookmarks, phases
 import lock as lockmod
@@ -63,7 +64,7 @@ def unfilteredmethod(orig):
     return wrapper
 
 moderncaps = set(('lookup', 'branchmap', 'pushkey', 'known', 'getbundle',
-                  'bundle2', 'unbundle'))
+                  'unbundle'))
 legacycaps = moderncaps.union(set(['changegroupsubset']))
 
 class localpeer(peer.peerrepository):
@@ -304,9 +305,10 @@ class localrepository(object):
     def _restrictcapabilities(self, caps):
         # bundle2 is not ready for prime time, drop it unless explicitly
         # required by the tests (or some brave tester)
-        if not self.ui.configbool('server', 'bundle2', False):
+        if self.ui.configbool('server', 'bundle2', False):
             caps = set(caps)
-            caps.discard('bundle2')
+            capsblob = bundle2.encodecaps(self.bundle2caps)
+            caps.add('bundle2=' + urllib.quote(capsblob))
         return caps
 
     def _applyrequirements(self, requirements):
diff --git a/mercurial/wireproto.py b/mercurial/wireproto.py
--- a/mercurial/wireproto.py
+++ b/mercurial/wireproto.py
@@ -586,7 +586,8 @@ def _capabilities(repo, proto):
         else:
             caps.append('streamreqs=%s' % ','.join(requiredformats))
     if repo.ui.configbool('server', 'bundle2', False):
-        caps.append('bundle2')
+        capsblob = bundle2.encodecaps(repo.bundle2caps)
+        caps.append('bundle2=' + urllib.quote(capsblob))
     caps.append('unbundle=%s' % ','.join(changegroupmod.bundlepriority))
     caps.append('httpheader=1024')
     return caps