Something strange about people wanting to feel independent, this idea that a foreign government claims some pseudoownership over your land and people just doesn't sit right. It's not morality but it's something innately human. That's why they might want to do it. I agree with you it comes with a lot of risks so lets examine the scenarios you laid out:
Option A: China attacks first; Japan militarizes, Korea gets engulfed in war, Russia and the US will get involved and we get nukes and WW3
Option B: Taiwan declares independence, The other South Asian countries are less concerned, The US is forced to isolate the conflict by increasing military funding,
In both options you are assuming the only way Beijing can politically handle Taiwanese independence is war but leaving that aside the reaction of the other players and the South Asian states in particular is where I disagree with you. China's influence over the south east asian states is a double edged sword. The situation in Myanmar has shown that even a China backed junta can be toppled( with some chinese help). The trend in the populations is towards western style democratic ideals and each individual country will have it's own fundamental issues. This is all to say that a chinese attack is going to be the absolute worst thing Xi can do for Chinese interests and it's highly unlikely even the US can control the ripple effects.
I personally don't think it would make sense for Taiwan to seek an independence referendum for a lot of similar reasons as yours but I wouldn't begrudge their people a choice that is theirs to make.
In the current political climate, I do not see how they can avoid war if they declare independence.
What I believe is important to remember about Taiwain is that it's a signal fire as much as a country. Taiwain, unfairly sure, represents the stability of the entire region and is a microcosm of the larger geopolitical situation in the region. It is a very real representation of the delicate power balance between China and the US, and its allies in the region. Japan and S.Korea are both keeping an eye on China and their reigional ambitions. While everyone is also keeping an eye on Japan's militarisation, who hisorically has been an agressor in the region. Should China attack without any "provocation", I think all hell would break loose. It would signal to the rest of the region that China has changed their regional ambitions and are becoming more agressive. Japan would push for defense spending to protect their claim over Senkaku. S.Korea would see that as a sign that the US has lost control over Japan's military and that their influence is waning, and start pushing their own defense spending to protect against both China and Japan. South Korea would be particularly worried that Japanese nationalism would rise and that Japan could aggressively seek to assert themselves as a leader in the region, and perhaps even go for the dokdo islands. An attack on Taiwain would tell the region that the US no longer has the power or influence to maintain stability and act as a counter-weight to China. The US would be forced to get involved to disprove that - and the reasons I outlined previously - which would mean that their military pressence in the region would become problematic.
If Taiwan were to announce their independence
now, this would be a seismic shift in the status quo. It would signal to the region that China is losing its influence, and that the balance of power has changed. Beijing would have to respond or conceed that their ambitions for regional influence have changed. Now they could just let it go and try to adapt to a more diplomatic type of influence, but this would cause singificant issues domestically. This situation may of course change in time, but as it is the CCP would struggle with this scenario and will want to respond forcefully. However, that response will likely be viewed through the lens of China being consistent in their regional ambitions. The US would at best get involved on equal footing to what we see in Ukraine, but nothing more, simply because it wouldn't be necessary to keep the rest of the region relatively stable - and I have my doubts they would even do that. The US will do what is necessary to maintain regional stability, they aren't a charity or moral beacon - contrary to what they may want to project outward. Theres no reason to believe that Beijing has become more agressive if they do so in response to a declaration of independence, and other countries in the region would be aware of that. It would cause heightened tensions for a while, but eventually the situation would calm down - provided the US doesn't do anything stupid in the meantime.
We see signs of how little interest the US would have to defend Taiwain should they announce their independence in the recent comments by Joe Biden.
"We do not support independence..." Biden said, when asked for reaction to Saturday's elections.
U.S. does not support Taiwan independence, Biden says | Reuters
Taiwainese people are of course free to make whatever decisions they wish to make, but the choice of declaring independence isn't really a choice. We can pretend that it makes a difference or does something positive, but in reality it's just a huge risk with literally no benefits.