What does it mean for an identity/label to be “good faith” or “bad faith”?

In general, the term “good faith” means done with good intentions. Doing something in good faith means you are being genuine, and you don’t secretly have bad or harmful intentions. It means you intend to not harm anyone.
The opposite, “bad faith,” means done with bad intentions. It means you are making it seem like your intentions are good, but really you intend to do something harmful. It means you actively intend to harm someone.
For a label to be “good faith” it means the person using the label does not intend to harm anyone by using it. They are using it genuinely, for their own fulfillment, not with any hidden harmful intentions. The vast majority of labels you see in the queer community are this.
For a label to be “bad faith” it means the person using the label DOES intend to harm someone by using it. They might say they’re using it genuinely, but they took on (or more often, invented) the label in order to harm others. This is far more rare in the queer community.
CW // abuse ment.
For example, groups of abusers online have invented labels to describe their abusive behavior as a sexuality and try to include it in the queer community. (A group of zoophiles invented “zoosexual” for one example of that.) These are bad faith labels.
These groups are aware the label and the way they use it is harmful. They are purposefully using the label to try to normalize and gain acceptance for their abusive behavior by trying to make it look like a queer identity. They are doing harm with that label on purpose.
As another example, say someone used a cultural gender label from a culture they are not a part of. They were told that this is wrong and inappropriate but continued to use it, after being told and knowing that it was harming others. They know it is harmful, so it is bad faith.
For an identity/label to be bad faith, it has to meet two criteria. It has to harm someone else (and that means real demonstrable harm, not just discomfort) and the person using that label has to be aware that it harms someone else. If both are true, it’s bad faith.
All good faith identities/labels are by definition harmless, and therefore should be respected. That is why “good faith” is a term often emphasized when talking about inclusivity. Though rare, people do sometimes use labels to actively harm others or be bigoted.