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It’s difficult to tell if its intentional with Vuetify 3 or that it actually needs work because its so poorly documented and there are no examples out there however I get this to work by omitting the chip props on the select component and implement the chip with a slot.
<v-select
v-model="items"
:items="config"
item-title="name"
item-value="name"
label="Select"
multiple
return-object
>
<template v-slot:selection="{ item, index, props }">
<v-chip closable :prepend-avatar="item.raw.img" v-bind="props" @click:close="update(index)">{{item.raw.name}}</v-chip>
</template>
<template v-slot:item="{ item, props }">
<v-list-item :prepend-avatar="item.raw.img" v-bind="props"></v-list-item>
</template>
</v-select>
Source:stackexchange.com