You are right, there is however a difference when one impersonates KKK for fun, and a person who uses that as a character flaw to give the character some growth in the future.

There is also of course the thing where people play as a character in a setting where everyone is essentially a nazi, i.e. wh40k

I tend to believe that it is okay to play such characters, it is okay for a player to play a character who screams about purging the unclean, the heretic and the xenos.

And if it is just a usual setting it is okay for a character that is deceived to believe that this pseudo KKK is good. As long as it is made clear ooc that they are not even remotely good

I don’t see a problem to be honest, although only if the players are experts in really be in character