If I want to enable dark theme directly in the app settings (that overrides the system settings), I store a Boolean in DataStore or SharedPreferences and pass that to my Theme composable? Is this the correct approach?

That's what I did. But now I'm thinking I should react to when the app user selects dark mode, not in my app, but on their phone. That is: give the user an option that says "mirror my phone's theme" and then change my theme accordingly.

yes, I have 3 options now

You could use a default and render the first screen. I'd use the system set light or dark mode, then rerender if the preferences value is different.

yes but this will show a visible color switch when the app starts