hey Finn,
I am in the same situation you are. My god son is my life, he is now 4 and I only started my transition in November of last year and T in January.Although I have always identified as male I never actually "came out" as trans until november....His mother has always been supportive and calls me his God Father...He refers to me as Daddy J and has never really seems to have a problem with the change. His mother and I have had conversations about what is "right or wrong" when it comes to explaining to him in the future. We have raised him to be very accepting of people no matter what color, gender or sexuality..His mother is a lesbian so he has grown up with her partner and knows that his mothers partner is female. His "sperm donor"(as we like to call him) is also gay and spends time with him here and there. So I guess it has always been a little bit easier for me to pass as male to him. I battle with the whole "will I confuse him?" "will he be disappointed" but at the same time I have to remember that as long as we continue to raise him to be accepting of people for who they are on the inside he will understand when he gets older that the inner beauty of a person is more important then what you see on the outside. So I would say don't hide it from him and be willing to answer the hard questions someday down the road if and when he does ever ask. As long as you remain a strong influence in his life when he gets older he is going to love you no matter what because he will be able to look back and know that you have always been there...
hope that helps some
~J~