I have added this issue to the tracker:
Issue 2427 – Prevent moving or copying a file or folder over ancestor folder with the same name

Thanks for your report. Well, yes indeed that's what happens. It's kind of expected. You are actually warned that the target folder (which happens to contains the source folder in your case) will be deleted. But I understand that WinSCP might prevent you from doing this in the first place. I'll look into it.

I tried to copy a folder with the same name to a folder (move it down because it named stepfun/stepfun. The move command did not move but delete the folder and files in it.