Why not just change the service files to ExecStart=@bindir@/kmscon --login -- /sbin/agetty -o '-p -- \\u' --noclear -- - $TERM? I don't see why adding a new option to kmscon makes sense here.

Sorry I don't think my solution works with how kmscon executes. This solution still seems like it only applies to agetty. Maybe it would be better to use a keyword that automatically gets substituted. The logic for this is in Aetf#124.

$TERM is interpreted by systemd, and the default is "linux" when I test it.
If you escape it with $$TERM, kmscon won't interpret it and will start agetty with '$TERM'.
so now you have

echo $TERM

$TERM

You can also add xterm-256color in systemd service, but then people have to modify the service script, and I find it better to be able to change that in /etc/kmscon/kmscon.conf

From a quick look it seems we could use a DCS sequence to inform systemd of which terminal type is being used (systemd/systemd#37538). But we probably still need a solution for all inits.

If you escape it with $$TERM, kmscon won't interpret it and will start agetty with '$TERM'.

I think this is because execve doesn't substitute environment variables. This could be fixed by always executing the command as sh -c 'command', but I am not sure if this causes any issues.
I think a better solution would be to implement the substitution in kmscon in the same way shells do.

I think a better solution would be to implement the substitution in kmscon in the same way shells do.

Agreed, done in my latest push.