I turned it into a moral issue. Not on the part of the child, but rather on the part of the parents and the adults who are complicit.
Your implication that any adult wants children like this "judged or made fun of" is silly and, frankly, stupid. There isn't an anti-bullying policy in this world that will ever keep a boy who dresses as a girl from being teased as they reach certain points in their lives. You're kidding yourself if you think otherwise, just as you're kidding yourself if you believe that this is the variable upon which the continued mental health of most of these kids rests.
Again:
1. Most kids grow out of these fixations as they get older.
2. The self-harm and suicide rates remain extraordinarily high across cultures, suggesting that it is not primarily environmental stimuli at the root of the problem.
3. Self-harm and suicide rates remain extraordinarily high even after reassignment surgery, again reinforcing the notion that it isn't primarily environmental.
I doubt you have much training or education in what you say to a child with respect to psychological disorders. Neither of us do. Fortunately, others do and are able to broach such subjects properly while working towards dealing with these sorts of fixations through cognitive therapy.
Would your reaction be the same if a young person insisted that he was a black person trapped inside of a white body? Or would your judgment simply rest upon whether his peers accepted this delusion? Which delusions should be acceptable to parents and other adults with regards to teenagers and which merit intervention by parents and adults? Why is this one different?