Yes I do think NSFW avatars should be marked with those tags when uploading so they can be hidden by those settings. I always do this and if you want to make an even more extreme NSFW tag rather than just sexually suggestive that would be fine too.

But punishing users for using an avatar that has nsfw features in a public instance even if they didn't use those features makes no sense.

I understand moderation is hard, and there are issues with how publics tend to be, but overpunishing things that don't hurt anything isn't the answer.

My voice is of saying slurs that could get me banned, but you don't ban me for having my mic on. You ban me if I DO THE ACTION that's against the rules.

If you feel like you'd need to do something else more extreme like only showing my avatar marked with that to people who are verified 18+ then okay but you're gonna need to make that system better because it's not good right now. See all the feedback on that