The lithium storage mechanism in molybdenum disulfide (MoS₂) has been comprehensively investigated as the existing conversion-based storage mechanism is unable to explain the reason behind its high practical capacity, high polarization losses, and the change in the discharge profile after the 1^st charge–discharge cycle. To resolve these issues and to gain a deeper understanding of MoS₂-based Li-ion batteries, for the first time, we have studied the reaction mechanism of the MoS₂ anode using various experimental techniques such as XRD, Raman spectroscopy, electrochemical impedance spectroscopy, XANES, and EXAFS, as well as ab initio density functional theory based calculations. On the basis of the results presented here, and in line with some experimental findings, we find that the reaction of MoS₂ with Li is not as simple as with usual metal oxide based conversion reactions, but that the pathway of the conversion reaction changes after the first discharge process. In the first discharge process, lithiation is initiated by a limited intercalation process, followed by a conversion reaction that produces molybdenum nanoparticles (Mo) and lithium sulfide (Li₂S). Whereas, unlike oxide-based conversion materials, MoS₂ does not transverse back during the delithiation process. Indeed, instead of MoS₂ formation, we identified the presence of polysulfur after the complete cycle. In consecutive cycles, polysulfur reacts with lithium and forms Li₂S/Li₂S₂, and this Li–S reaction is found to be highly reversible in nature and the only source of the high practical capacity observed in this electrode. To validate our experimental findings, an atomic scale ab initio computational study was also carried out, which likewise suggests that Li first intercalates between the MoS₂ layers but that after a certain concentration, it reacts with MoS₂ to form Li₂S. The calculations also support the non-reversibility of the conversion reaction, by showing that Mo + Li₂S formation is energetically more favorable than the re-formation of MoS₂ + Li.