Username - looks like you've put a lot of thought into this rather than just running, screaming, away from The Gay!
Where do we draw the line? We've let DS do that - there are some places he's happy to wear a dress, like particular friends' houses, the park just by our house and some parties, yes. He decides, and he knows when it's going to be accepted without a word and when it's not. I actually wonder if he uses it as a friend filter sometimes....
Social norms - by having "norms" you implicitly accept that you're going to have outliers, (outlayers?) who don't conform, so as long as they're not damaging anyone, and they don't have "Shit off, Grandma" tattooed on their foreheads....leave it be.
Why is wearing dresses a step too far? Do you worry about bullying? We've never had to equip DS with one-liners, tbh, he's come up with them on his own. On Book Day, he didn't want to dress up so went into school as normal and when a chum asked him who he was, he shrugged and said "DS' Name".
You're right, it is tough out there, but there's no point encouraging children to hide themselves and their real selves away, because what does that teach them, ultimately? There's always going to be people who are different/unusual/individualistic...fuck it...even eccentric!
Too many people twist themselves into all kinds of shapes just trying to fit in to some perceived "normal" or "acceptable" and they end up wasting years! I was always a bit weird - nice with it, but quirky. I like me, always have done, and so do lots of other people....this is what I want for DS and DD - the confidence to be themselves. Not braying arrogance, just confidence to pootle along, ploughing their own furrows in life.