Is we need to define what we mean when we ask for someone's sex or gender on a form. I think part of the problem is different people identify what it means differently. Some in the transgender community say it is 100% about what you personally choose to identify as. So you could be genetically male, have an XY chromosome set, and biologically male, as in have male genitals and body structure, but identify yourself as female and that's what you should mark down. However other people might disagree. If you went in to the woman's dressing room at a rec center the biological women in there might not be at all comfortable with that since they identify you as male, due to your biology.
So one of the things we need to do is clarify the terms, and perhaps have different terms for identifying someone's genetic structure, biological makeup, and sexual identity.
Like when you are talking to a doctor, the genetic definition matters. Reason is that health issues do NOT affect both genders equally, and it has nothing to do with appearance or identity, it has to do with genetics. So even if you've had a sex change operation and all that, proper identification as genetically male could be relevant to medical providers.
For most people it is more about biology, as in what bits do you have between your legs. We visually identify people as male or female, and most are pretty clearly one or the other. That is one of the reasons it gets asked for lots of forms of ID is to help ensure that the ID is for the person holding it. For that, we might want to use your biological appearance. If you undergo a sex change surgery, then you change that identifier.
In terms of the pronoun you wish people to use to identify your gender, that really is up to you, though you need to understand it can be confusing to people if you appear and sound different than you identify.
So as you say we need to review why the information is collected, and then define terms to say what sort of thing we are talking about. We can't just say "Well let people identify as whatever they want," since reality doesn't work that way. However if you are just collecting it for no real reason, then don't and let people identify how they wish.