diff --git a/dvc/ignore.py b/dvc/ignore.py
new file mode 100644
index 0000000000..d989d9a8e6
--- /dev/null
+++ b/dvc/ignore.py
@@ -0,0 +1,134 @@
+import os
+
+from dulwich.ignore import match_pattern, read_ignore_patterns
+from dvc.utils.compat import cast_bytes
+from dvc.utils.fs import get_parent_dirs_up_to
+
+
+class DvcIgnoreFileHandler(object):
+    def __init__(self, tree):
+        self.tree = tree
+
+    def read_patterns(self, path):
+        with self.tree.open(path, binary=True) as stream:
+            return self._read_patterns(stream)
+
+    def get_repo_root(self):
+        return self.tree.tree_root
+
+    def _read_patterns(self, binary_stream):
+        negate_patterns = []
+        patterns = []
+        for pattern in read_ignore_patterns(binary_stream):
+            if pattern.lstrip().startswith(b"!"):
+                negate_patterns.append(pattern)
+            else:
+                patterns.append(pattern)
+
+        return negate_patterns, patterns
+
+
+class DvcIgnore(object):
+    DVCIGNORE_FILE = ".dvcignore"
+
+    def __call__(self, root, dirs, files):
+        raise NotImplementedError
+
+
+class DvcIgnoreFromFile(DvcIgnore):
+    def __init__(self, ignore_file_path, ignore_handler):
+        self.ignore_file_path = ignore_file_path
+        self.dirname = os.path.normpath(os.path.dirname(ignore_file_path))
+        self.patterns = []
+        self.negate_patterns = []
+
+        self.negate_patterns, self.patterns = ignore_handler.read_patterns(
+            ignore_file_path
+        )
+
+    def __call__(self, root, dirs, files):
+        files = [f for f in files if not self.matches(root, f)]
+        dirs = [d for d in dirs if not self.matches(root, d)]
+
+        return dirs, files
+
+    def get_match(self, abs_path):
+        rel_path = os.path.relpath(abs_path, self.dirname)
+        if os.name == "nt":
+            rel_path = rel_path.replace("\\", "/")
+        rel_path = cast_bytes(rel_path, "utf-8")
+
+        for pattern in self.patterns:
+            if match_pattern(
+                rel_path, pattern
+            ) and self._no_negate_pattern_matches(rel_path):
+                return (abs_path, pattern, self.ignore_file_path)
+        return None
+
+    def matches(self, dirname, basename):
+        if self.get_match(os.path.join(dirname, basename)):
+            return True
+        return False
+
+    def _no_negate_pattern_matches(self, path):
+        return all([not match_pattern(path, p) for p in self.negate_patterns])
+
+    def __hash__(self):
+        return hash(self.ignore_file_path)
+
+
+class DvcIgnoreConstant(DvcIgnore):
+    def __init__(self, basename):
+        self.basename = basename
+
+
+class DvcIgnoreDir(DvcIgnoreConstant):
+    def __call__(self, root, dirs, files):
+        dirs = [d for d in dirs if not d == self.basename]
+
+        return dirs, files
+
+
+class DvcIgnoreFile(DvcIgnoreConstant):
+    def __call__(self, root, dirs, files):
+        files = [f for f in files if not f == self.basename]
+
+        return dirs, files
+
+
+class DvcIgnoreFilter(object):
+    def __init__(self, wdir, ignore_file_handler=None):
+        self.ignores = [
+            DvcIgnoreDir(".git"),
+            DvcIgnoreDir(".hg"),
+            DvcIgnoreDir(".dvc"),
+            DvcIgnoreFile(".dvcignore"),
+        ]
+
+        self.ignore_file_handler = ignore_file_handler
+        self._process_ignores_in_parent_dirs(wdir)
+
+    def _process_ignores_in_parent_dirs(self, wdir):
+        if self.ignore_file_handler:
+            wdir = os.path.normpath(os.path.abspath(wdir))
+            ignore_search_end_dir = self.ignore_file_handler.get_repo_root()
+            parent_dirs = get_parent_dirs_up_to(wdir, ignore_search_end_dir)
+            for d in parent_dirs:
+                self.update(d)
+
+    def update(self, wdir):
+        ignore_file_path = os.path.join(wdir, DvcIgnore.DVCIGNORE_FILE)
+        if os.path.exists(ignore_file_path):
+            file_ignore = DvcIgnoreFromFile(
+                ignore_file_path, ignore_handler=self.ignore_file_handler
+            )
+            self.ignores.append(file_ignore)
+
+    def __call__(self, root, dirs, files):
+        if self.ignore_file_handler:
+            self.update(root)
+
+        for ignore in self.ignores:
+            dirs, files = ignore(root, dirs, files)
+
+        return dirs, files
diff --git a/dvc/repo/__init__.py b/dvc/repo/__init__.py
index 8a5bc7bc7f..65c204c6d4 100644
--- a/dvc/repo/__init__.py
+++ b/dvc/repo/__init__.py
@@ -11,7 +11,7 @@
     OutputNotFoundError,
     TargetNotDirectoryError,
 )
-
+from dvc.ignore import DvcIgnoreFileHandler
 
 logger = logging.getLogger(__name__)
 
@@ -58,7 +58,7 @@ def __init__(self, root_dir=None):
 
         self.config = Config(self.dvc_dir)
 
-        self.tree = WorkingTree()
+        self.tree = WorkingTree(self.root_dir)
 
         self.scm = SCM(self.root_dir, repo=self)
         self.lock = Lock(self.dvc_dir)
@@ -390,7 +390,11 @@ def stages(self, from_directory=None, check_dag=True):
 
         stages = []
         outs = []
-        for root, dirs, files in self.tree.walk(from_directory):
+
+        ignore_file_handler = DvcIgnoreFileHandler(self.tree)
+        for root, dirs, files in self.tree.walk(
+            from_directory, ignore_file_handler=ignore_file_handler
+        ):
             for fname in files:
                 path = os.path.join(root, fname)
                 if not Stage.is_valid_filename(path):
diff --git a/dvc/repo/brancher.py b/dvc/repo/brancher.py
index bc4f3e38a8..e84fcaf708 100644
--- a/dvc/repo/brancher.py
+++ b/dvc/repo/brancher.py
@@ -27,7 +27,7 @@ def brancher(  # noqa: E302
     if self.scm.is_dirty():
         from dvc.scm.tree import WorkingTree
 
-        self.tree = WorkingTree()
+        self.tree = WorkingTree(self.root_dir)
         yield "Working Tree"
 
     if all_branches:
diff --git a/dvc/scm/git/tree.py b/dvc/scm/git/tree.py
index d6aff9151c..3cb21834be 100644
--- a/dvc/scm/git/tree.py
+++ b/dvc/scm/git/tree.py
@@ -1,7 +1,8 @@
 import errno
 import os
 
-from dvc.utils.compat import StringIO
+from dvc.ignore import DvcIgnoreFilter
+from dvc.utils.compat import StringIO, BytesIO
 
 from dvc.scm.tree import BaseTree
 
@@ -24,7 +25,11 @@ def __init__(self, git, rev):
         self.git = git
         self.rev = rev
 
-    def open(self, path):
+    @property
+    def tree_root(self):
+        return self.git.working_dir
+
+    def open(self, path, binary=False):
 
         relpath = os.path.relpath(path, self.git.working_dir)
 
@@ -39,7 +44,10 @@ def open(self, path):
         # read it immediately, also it needs to be to decoded if we follow
         # the `open()` behavior (since data_stream.read() returns bytes,
         # and `open` with default "r" mode returns str)
-        return StringIO(obj.data_stream.read().decode("utf-8"))
+        data = obj.data_stream.read()
+        if binary:
+            return BytesIO(data)
+        return StringIO(data.decode("utf-8"))
 
     def exists(self, path):
         return self.git_object_by_path(path) is not None
@@ -81,8 +89,13 @@ def git_object_by_path(self, path):
             tree = tree[i]
         return tree
 
-    def _walk(self, tree, topdown=True):
-
+    def _walk(
+        self,
+        tree,
+        topdown=True,
+        ignore_file_handler=None,
+        dvc_ignore_filter=None,
+    ):
         dirs, nondirs = [], []
         for i in tree:
             if i.mode == GIT_MODE_DIR:
@@ -91,14 +104,26 @@ def _walk(self, tree, topdown=True):
                 nondirs.append(i.name)
 
         if topdown:
+            if not dvc_ignore_filter:
+                dvc_ignore_filter = DvcIgnoreFilter(
+                    tree.abspath, ignore_file_handler=ignore_file_handler
+                )
+            dirs, nondirs = dvc_ignore_filter(tree.path, dirs, nondirs)
             yield os.path.normpath(tree.path), dirs, nondirs
+
         for i in dirs:
-            for x in self._walk(tree[i], topdown=True):
+            for x in self._walk(
+                tree[i],
+                topdown=True,
+                ignore_file_handler=ignore_file_handler,
+                dvc_ignore_filter=dvc_ignore_filter,
+            ):
                 yield x
+
         if not topdown:
             yield os.path.normpath(tree.path), dirs, nondirs
 
-    def walk(self, top, topdown=True):
+    def walk(self, top, topdown=True, ignore_file_handler=None):
         """Directory tree generator.
 
         See `os.walk` for the docs. Differences:
diff --git a/dvc/scm/tree.py b/dvc/scm/tree.py
index 3e215ff09b..c411a7076f 100644
--- a/dvc/scm/tree.py
+++ b/dvc/scm/tree.py
@@ -1,12 +1,17 @@
 import os
 
+from dvc.utils import dvc_walk
 from dvc.utils.compat import open
 
 
 class BaseTree(object):
     """Abstract class to represent access to files"""
 
-    def open(self, path):
+    @property
+    def tree_root(self):
+        pass
+
+    def open(self, path, binary=False):
         """Open file and return a stream."""
 
     def exists(self, path):
@@ -18,7 +23,7 @@ def isdir(self, path):
     def isfile(self, path):
         """Test whether a path is a regular file"""
 
-    def walk(self, top, topdown=True):
+    def walk(self, top, topdown=True, ignore_file_handler=None):
         """Directory tree generator.
 
         See `os.walk` for the docs. Differences:
@@ -30,8 +35,17 @@ def walk(self, top, topdown=True):
 class WorkingTree(BaseTree):
     """Proxies the repo file access methods to working tree files"""
 
-    def open(self, path):
+    def __init__(self, repo_root=os.getcwd()):
+        self.repo_root = repo_root
+
+    @property
+    def tree_root(self):
+        return self.repo_root
+
+    def open(self, path, binary=False):
         """Open file and return a stream."""
+        if binary:
+            return open(path, "rb")
         return open(path, encoding="utf-8")
 
     def exists(self, path):
@@ -46,7 +60,7 @@ def isfile(self, path):
         """Test whether a path is a regular file"""
         return os.path.isfile(path)
 
-    def walk(self, top, topdown=True):
+    def walk(self, top, topdown=True, ignore_file_handler=None):
         """Directory tree generator.
 
         See `os.walk` for the docs. Differences:
@@ -57,9 +71,10 @@ def walk(self, top, topdown=True):
         def onerror(e):
             raise e
 
-        for root, dirs, files in os.walk(
-            top, topdown=topdown, onerror=onerror
+        for root, dirs, files in dvc_walk(
+            top,
+            topdown=topdown,
+            onerror=onerror,
+            ignore_file_handler=ignore_file_handler,
         ):
-            if topdown:
-                dirs[:] = [i for i in dirs if i not in (".git", ".hg", ".dvc")]
             yield os.path.normpath(root), dirs, files
diff --git a/dvc/utils/__init__.py b/dvc/utils/__init__.py
index 83faa59e78..5b5f206d8b 100644
--- a/dvc/utils/__init__.py
+++ b/dvc/utils/__init__.py
@@ -257,8 +257,39 @@ def load_stage_file_fobj(fobj, path):
         raise StageFileCorruptedError(path)
 
 
-def walk_files(directory):
-    for root, _, files in os.walk(str(directory)):
+def dvc_walk(
+    top,
+    topdown=True,
+    onerror=None,
+    followlinks=False,
+    ignore_file_handler=None,
+):
+    """
+    Proxy for `os.walk` directory tree generator.
+    Utilizes DvcIgnoreFilter functionality.
+    """
+    ignore_filter = None
+    if topdown:
+        from dvc.ignore import DvcIgnoreFilter
+
+        ignore_filter = DvcIgnoreFilter(
+            top, ignore_file_handler=ignore_file_handler
+        )
+
+    for root, dirs, files in os.walk(
+        top, topdown=topdown, onerror=onerror, followlinks=followlinks
+    ):
+
+        if ignore_filter:
+            dirs[:], files[:] = ignore_filter(root, dirs, files)
+
+        yield root, dirs, files
+
+
+def walk_files(directory, ignore_file_handler=None):
+    for root, _, files in dvc_walk(
+        str(directory), ignore_file_handler=ignore_file_handler
+    ):
         for f in files:
             yield os.path.join(root, f)
 
diff --git a/dvc/utils/compat.py b/dvc/utils/compat.py
index bf0803427d..b32b38e969 100644
--- a/dvc/utils/compat.py
+++ b/dvc/utils/compat.py
@@ -93,6 +93,7 @@ def _makedirs(name, mode=0o777, exist_ok=False):
 if is_py2:
     from urlparse import urlparse, urljoin  # noqa: F401
     from StringIO import StringIO  # noqa: F401
+    from io import BytesIO  # noqa: F401
     from BaseHTTPServer import HTTPServer  # noqa: F401
     from SimpleHTTPServer import SimpleHTTPRequestHandler  # noqa: F401
     import ConfigParser  # noqa: F401
@@ -111,7 +112,7 @@ def _makedirs(name, mode=0o777, exist_ok=False):
 elif is_py3:
     from os import makedirs  # noqa: F401
     from urllib.parse import urlparse, urljoin  # noqa: F401
-    from io import StringIO  # noqa: F401
+    from io import StringIO, BytesIO  # noqa: F401
     from http.server import (  # noqa: F401
         HTTPServer,  # noqa: F401
         SimpleHTTPRequestHandler,  # noqa: F401
diff --git a/dvc/utils/fs.py b/dvc/utils/fs.py
index 7b3c67101d..cecc0a207f 100644
--- a/dvc/utils/fs.py
+++ b/dvc/utils/fs.py
@@ -7,6 +7,7 @@
 
 from dvc.exceptions import DvcException
 from dvc.system import System
+from dvc.utils import dvc_walk
 from dvc.utils.compat import str
 
 
@@ -24,7 +25,7 @@ def get_mtime_and_size(path):
     mtime = os.path.getmtime(path)
 
     if os.path.isdir(path):
-        for root, dirs, files in os.walk(str(path)):
+        for root, dirs, files in dvc_walk(str(path)):
             for name in dirs + files:
                 entry = os.path.join(root, name)
                 try:
@@ -63,3 +64,22 @@ def contains_symlink_up_to(path, base_path):
     if os.path.dirname(path) == path:
         return False
     return contains_symlink_up_to(os.path.dirname(path), base_path)
+
+
+def get_parent_dirs_up_to(wdir, root_dir):
+
+    assert os.path.isabs(wdir)
+    assert os.path.isabs(root_dir)
+
+    wdir = os.path.normpath(wdir)
+    root_dir = os.path.normpath(root_dir)
+    if root_dir not in wdir:
+        return []
+
+    dirs = []
+    dirs.append(wdir)
+    while wdir != root_dir:
+        wdir = os.path.dirname(wdir)
+        dirs.append(wdir)
+
+    return dirs
diff --git a/requirements.txt b/requirements.txt
index 374f7baeda..5723655b1c 100644
--- a/requirements.txt
+++ b/requirements.txt
@@ -28,3 +28,4 @@ appdirs>=1.4.3
 treelib>=1.5.5
 inflect>=2.1.0
 humanize>=0.5.1
+dulwich>=0.19.11
diff --git a/setup.py b/setup.py
index f394141d28..afe1a6260e 100644
--- a/setup.py
+++ b/setup.py
@@ -58,6 +58,7 @@ def run(self):
     "treelib>=1.5.5",
     "inflect>=2.1.0",
     "humanize>=0.5.1",
+    "dulwich>=0.19.11",
 ]
 
 # Extra dependencies for remote integrations
diff --git a/tests/test_ignore.py b/tests/test_ignore.py
new file mode 100644
index 0000000000..ca90387370
--- /dev/null
+++ b/tests/test_ignore.py
@@ -0,0 +1,68 @@
+import os
+
+from dvc.ignore import DvcIgnoreFromFile, DvcIgnore, DvcIgnoreFileHandler
+from dvc.utils.compat import cast_bytes
+from tests.basic_env import TestDvc
+
+
+class TestDvcIgnore(TestDvc):
+    def setUp(self):
+        super(TestDvcIgnore, self).setUp()
+        self.ignore_file_handler = DvcIgnoreFileHandler(self.dvc.tree)
+
+    def _get_all_paths(self):
+
+        paths = []
+        ignore_file_handler = DvcIgnoreFileHandler(self.dvc.tree)
+        for root, dirs, files in self.dvc.tree.walk(
+            self.dvc.root_dir, ignore_file_handler=ignore_file_handler
+        ):
+            for dname in dirs:
+                paths.append(os.path.join(root, dname))
+
+            for fname in files:
+                paths.append(os.path.join(root, fname))
+
+        return paths
+
+    def test_ignore_comments(self):
+        ignore_file = os.path.join(self.dvc.root_dir, DvcIgnore.DVCIGNORE_FILE)
+        with open(ignore_file, "w") as fobj:
+            fobj.write(os.path.basename(self.DATA))
+            fobj.write(" #this is comment")
+
+        ignore = DvcIgnoreFromFile(ignore_file, self.ignore_file_handler)
+
+        self.assertEqual(1, len(ignore.patterns))
+
+    def test_ignore_in_child_dir(self):
+        ignore_file = os.path.join(self.dvc.root_dir, DvcIgnore.DVCIGNORE_FILE)
+        with open(ignore_file, "w") as fobj:
+            fobj.write("data_dir/data")
+
+        forbidden_path = os.path.join(self.dvc.root_dir, self.DATA)
+        all_paths = self._get_all_paths()
+
+        self.assertNotIn(forbidden_path, all_paths)
+
+    def test_ignore_in_child_dir_unicode(self):
+        ignore_file = os.path.join(self.dvc.root_dir, DvcIgnore.DVCIGNORE_FILE)
+        with open(ignore_file, "wb") as fobj:
+            fobj.write(cast_bytes(self.UNICODE, "utf-8"))
+
+        forbidden_path = os.path.join(self.dvc.root_dir, self.UNICODE)
+        all_paths = self._get_all_paths()
+
+        self.assertNotIn(forbidden_path, all_paths)
+
+    def test_ignore_in_parent_dir(self):
+        ignore_file = os.path.join(self.dvc.root_dir, DvcIgnore.DVCIGNORE_FILE)
+        with open(ignore_file, "w") as fobj:
+            fobj.write("data_dir/data")
+
+        os.chdir(self.DATA_DIR)
+
+        forbidden_path = os.path.join(self.dvc.root_dir, self.DATA)
+        all_paths = self._get_all_paths()
+
+        self.assertNotIn(forbidden_path, all_paths)
diff --git a/tests/test_repo.py b/tests/test_repo.py
index aa33063016..43aced7c4d 100644
--- a/tests/test_repo.py
+++ b/tests/test_repo.py
@@ -1,3 +1,5 @@
+from dvc.main import main
+from dvc.stage import Stage
 from tests.basic_env import TestDvc
 
 from dvc.scm.git import GitTree
@@ -44,3 +46,27 @@ def test(self):
         )
         result = self._check("new_branch", "buzz", False, [["buzz"]])
         self.assertEqual([i.rel_path for i in result[0].deps], ["bar"])
+
+
+class TestIgnore(TestDvc):
+    def _stage_name(self, file):
+        return file + Stage.STAGE_FILE_SUFFIX
+
+    def test_should_not_gather_stage_files_from_ignored_d(self):
+        ret = main(["add", self.FOO, self.BAR, self.DATA, self.DATA_SUB])
+        self.assertEqual(0, ret)
+
+        stages = self.dvc.stages()
+        self.assertEqual(4, len(stages))
+
+        with open(".dvcignore", "w") as fobj:
+            fobj.write("data_dir")
+
+        stages = self.dvc.stages()
+        self.assertEqual(2, len(stages))
+
+        stagenames = [s.relpath for s in stages]
+        self.assertIn(self._stage_name(self.FOO), stagenames)
+        self.assertIn(self._stage_name(self.BAR), stagenames)
+        self.assertNotIn(self._stage_name(self.DATA), stagenames)
+        self.assertNotIn(self._stage_name(self.DATA_SUB), stagenames)
diff --git a/tests/unit/test_ignore.py b/tests/unit/test_ignore.py
new file mode 100644
index 0000000000..5c50feb040
--- /dev/null
+++ b/tests/unit/test_ignore.py
@@ -0,0 +1,132 @@
+import os
+
+import pytest
+from dvc.ignore import DvcIgnoreFromFile, DvcIgnoreDir, DvcIgnoreFile
+from mock import patch, Mock
+
+from dvc.utils.compat import cast_bytes
+
+
+def read_pattern(p):
+    return cast_bytes(p, "utf-8")
+
+
+def mock_dvcignore(dvcignore_path, negate_patterns, patterns):
+    negate_patterns = [read_pattern(p) for p in negate_patterns]
+    patterns = [read_pattern(p) for p in patterns]
+
+    mock_ignore_file_handler = Mock()
+    with patch.object(
+        mock_ignore_file_handler,
+        "read_patterns",
+        return_value=(negate_patterns, patterns),
+    ):
+        ignore_file = DvcIgnoreFromFile(
+            dvcignore_path, mock_ignore_file_handler
+        )
+    return ignore_file
+
+
+def test_ignore_from_file_should_filter_dirs_and_files():
+    dvcignore_path = os.path.join(
+        os.path.sep, "full", "path", "to", "ignore", "file", ".dvcignore"
+    )
+
+    negate_patterns = []
+    patterns = ["dir_to_ignore", "file_to_ignore"]
+
+    root = os.path.dirname(dvcignore_path)
+    dirs = ["dir1", "dir2", "dir_to_ignore"]
+    files = ["file1", "file2", "file_to_ignore"]
+
+    ignore = mock_dvcignore(dvcignore_path, negate_patterns, patterns)
+    new_dirs, new_files = ignore(root, dirs, files)
+
+    assert {"dir1", "dir2"} == set(new_dirs)
+    assert {"file1", "file2"} == set(new_files)
+
+
+@pytest.mark.parametrize(
+    "file_to_ignore_relpath, negate_patterns,patterns,  expected_match",
+    [
+        ("to_ignore", [], ["to_ignore"], True),
+        ("to_ignore.txt", [], ["to_ignore*"], True),
+        (
+            os.path.join("rel", "p", "p2", "to_ignore"),
+            [],
+            ["rel/**/to_ignore"],
+            True,
+        ),
+        (
+            os.path.join(
+                os.path.sep,
+                "full",
+                "path",
+                "to",
+                "ignore",
+                "file",
+                "to_ignore",
+            ),
+            [],
+            ["to_ignore"],
+            True,
+        ),
+        ("to_ignore.txt", [], ["/*.txt"], True),
+        (
+            os.path.join("rel", "path", "path2", "to_ignore"),
+            [],
+            ["rel/*/to_ignore"],
+            False,
+        ),
+        (os.path.join("path", "to_ignore.txt"), [], ["/*.txt"], False),
+        (
+            os.path.join("rel", "path", "path2", "dont_ignore"),
+            [],
+            ["rel/**/to_ignore"],
+            False,
+        ),
+        ("dont_ignore.txt", [], ["dont_ignore"], False),
+        ("dont_ignore.txt", ["!dont_ignore.txt"], ["dont*"], False),
+    ],
+)
+def test_match_ignore_from_file(
+    file_to_ignore_relpath, negate_patterns, patterns, expected_match
+):
+
+    dvcignore_path = os.path.join(
+        os.path.sep, "full", "path", "to", "ignore", "file", ".dvcignore"
+    )
+    dvcignore_dirname = os.path.dirname(dvcignore_path)
+
+    ignore_file = mock_dvcignore(dvcignore_path, negate_patterns, patterns)
+
+    assert (
+        ignore_file.matches(dvcignore_dirname, file_to_ignore_relpath)
+        == expected_match
+    )
+
+
+@pytest.mark.parametrize("omit_dir", [".git", ".hg", ".dvc"])
+def test_should_ignore_dir(omit_dir):
+    ignore = DvcIgnoreDir(omit_dir)
+
+    root = os.path.join(os.path.sep, "walk", "dir", "root")
+    dirs = [omit_dir, "dir1", "dir2"]
+    files = []
+
+    new_dirs, _ = ignore(root, dirs, files)
+
+    assert set(new_dirs) == {"dir1", "dir2"}
+
+
+def test_should_ignore_file():
+    dvcignore = ".dvcignore"
+    ignore = DvcIgnoreFile(dvcignore)
+
+    root = os.path.join(os.path.sep, "walk", "dir", "root")
+    dirs = []
+    files = ["file1", "file2", dvcignore]
+
+    _, new_files = ignore(root, dirs, files)
+
+    assert set(new_files) == {"file1", "file2"}
diff --git a/tests/unit/utils/test_fs.py b/tests/unit/utils/test_fs.py
index 109422715a..dc2f034aa4 100644
--- a/tests/unit/utils/test_fs.py
+++ b/tests/unit/utils/test_fs.py
@@ -2,12 +2,14 @@
 from unittest import TestCase
 
 import dvc
+import pytest
 from dvc.system import System
 from dvc.utils.compat import str
 from dvc.utils.fs import (
     get_mtime_and_size,
     contains_symlink_up_to,
     BasePathNotInCheckedPathException,
+    get_parent_dirs_up_to,
 )
 from mock import patch
 from tests.basic_env import TestDir
@@ -90,3 +92,46 @@ def base_path_is_symlink(path):
             System, "is_symlink", side_effect=base_path_is_symlink
         ):
             self.assertFalse(contains_symlink_up_to(target_path, base_path))
+
+
+@pytest.mark.parametrize(
+    "path1, path2",
+    [
+        (
+            os.path.join("non", "abs", "path"),
+            os.path.join(os.sep, "full", "path"),
+        ),
+        (
+            os.path.join(os.sep, "full", "path"),
+            os.path.join("non", "abs", "path"),
+        ),
+    ],
+)
+def test_get_parent_dirs_up_to_should_raise_on_no_absolute(path1, path2):
+    with pytest.raises(AssertionError):
+        get_parent_dirs_up_to(path1, path2)
+
+
+@pytest.mark.parametrize(
+    "path1, path2, expected_dirs",
+    [
+        (
+            os.path.join(os.sep, "non", "matching", "path"),
+            os.path.join(os.sep, "other", "path"),
+            [],
+        ),
+        (
+            os.path.join(os.sep, "some", "long", "path"),
+            os.path.join(os.sep, "some"),
+            [
+                os.path.join(os.sep, "some"),
+                os.path.join(os.sep, "some", "long"),
+                os.path.join(os.sep, "some", "long", "path"),
+            ],
+        ),
+    ],
+)
+def test_get_parent_dirs_up_to(path1, path2, expected_dirs):
+    result = get_parent_dirs_up_to(path1, path2)
+
+    assert set(result) == set(expected_dirs)