Well, you were trying to be too clever!
The environment variables only work as expected when being on the same command line with the VBoxClient command. I'm not sure why that is the case, but it could have to do with the VBoxClient command spawning itself a second time (which is the reason for using pkill to kill both old processes). But what I am sure about is that using sudo does not work here (and I didn't tell you to do that ).
That's a consequence of separating the environment variables with sudo from the VBoxClient command.
You could try once more using the two commands exactly as I provided them, and I'd take another look.
VirtualBox doesn't really support Wayland yet (work in progress), only X11 (and XWayland providing X11 services), so problems are to be expected.
Regarding the end-of-line (EOL) conversion, VirtualBox does only add or remove <CR> characters before <LF> characters when converting between different clipboard text formats (UTF-8 to UCS-16 in the Linux to Windows case). If there was a bug doing the EOL conversion more than once, you could only end up with <CR>...<CR><LF>. The <CR><LF><CR><LF> in your screenshot seems to indicate that the initial <LF> gets doubled before VirtualBox applies the EOL conversion.