I did a lot more tests and made a bug report using feedback assistant, these are the tests I have done:
1. Removed my com.apple.finder.plist file in ~/Library/Preferences. A: When I restarted Finder with the Opt+Shift+Esc dialogue it works but once I restart the issue persists NOTE: After testing again I found out that just force restarting the Finder temporarily fixes the issue.
2. Restarted, Shutdown, Sleep mode, Logout, Etc after temporally fixing the issue by restarting Finder, and it seems only shutdown and restart cause the issue
3. I created a new user called “Test” and logged into the account. A: After restarting and logging into the account the AirDrop on the finder sidebar disappears, but once I log out and switch to my main account the AirDrop reappears, and if I log out of the account with the broken AirDrop and log back in the issue will still be present
4. I thought it may be an update issue so I waited until Sequoia 15.1 and updated A: After updating my issue is fixed, until I then restart and the issue reappears, the same thing occurred when upgrading to Sequoia 15.1.1 (the version I ran the other tests on), the Airdrop worked, I restarted, and the issue persisted.
also I have lots of old devices in my house, some not able to update past IOS 16 and @dalek2000 said that he had to turn off his homes devices for it to work so it may be a bug with AirDrops communication and MacOS Sequoia, also to use AirDrop without adding it to the sidebar, you can hold CMD+Space to bring up spotlight, search AirDrop, and use the app instead of the finder ui