I've ran Docker in LXC in a KVM before. I used LXC to have multiple containers on a VPS. Then I had to run something that works best with Docker, so I stuck Docker in an LXC.
Windows itself is technically running in a VM if you have Hyper-V enabled (not quite that simple, but that's a reasonable approximation). Hyper-V is a type 1 hypervisor which means it runs directly on the underlying physical hardware, and both Windows as well as any VMs you create are running on top of Hyper-V.
Using Docker in a VM on a Hypervisor is industry standard, using docker inside of docker may be okay for CI purposes but I wouldn't do anything more than that in production if it's not necessary.
The stack from the image above (Windows>WSL> Docker>Minikube>Docker>App) is something you'd use on a dev machine (not a "real", production-like test environment), in which case you don't really care about the performance loss