from John C
Time Machine backs up what is actually on your Mac. Apple says Time Machine backs up files on your Mac, while macOS can also keep some iCloud Drive items only in iCloud when storage is optimized. Files that are not downloaded locally are therefore not available for Time Machine to copy.
For iCloud Drive items, the practical rule is:
Downloaded / local copy present on the Mac at backup time → Time Machine can back it up.
Only a cloud placeholder, not downloaded → Time Machine does not have the full file to back up.
So for older versions of files in Time Machine, the file needed to exist locally at the time of those backups. If the file was only in iCloud and not downloaded during those earlier backups, Time Machine would not have captured those earlier versions. Apple also notes that Time Machine can restore previous versions, and local snapshots may preserve recent versions for up to about 24 hours on APFS, but that still depends on the file having existed locally.
The safest setup is to mark important iCloud Drive folders or files as Keep Downloaded so they stay on the Mac. Apple documents that option directly in Finder.