Drag shows were a common form of entertainment for British and imperial troops during both world wars, although I will focus more on the first in my answer. Cross-dressing is a really complex phenomenon for historians to explain. You can also check out u/Georgy_K_Zhukov's answer on the thread where the photo you are talking about is posted.

Obviously, there were few women present on the front-lines, so men acted their parts in theater shows, and did so quite well according to our sources, like this British soldier who fought in Macedonia in the Great War:

"They were simply known to us as F.I.s, that is female impersonators as I doubt whether the name 'drag' had been invented then. Those who took male parts and all our regulars had their special 'pets' and jealousy amongst the 'ladies' was, in consequence, rampant, one particular chorus girl, for instance, was much discussed, praised by some and blamed by others, because during the singing of a special hit by one of the principals, she would persist in making goo-goo eyes and at the audience and drawing all the attention on herself."

Performances like that were not unique or secretive but a sanctioned and common form of entertainment on all theaters throughout the war. At least 80% of British divisions had a "concert party," as these theater troupes were known, made up of enlisted men and junior officers. Official training manuals recommended them alongside other activities like sport as key to maintaining morale and building esprit de corps. And these performances almost always had men performing in drag.

In letters and diaries, soldiers went out of their way to de-emphasize the transgressive and homosexual nature of these drag shows, even the relatively few sources which criticized these performances. Soldiers explained their attraction to men dressed as women by stressing how realistic and feminine the performers looked. "It was quite impossible," wrote another soldier in Macedonia, "to realise that these delicate young creatures were young men who drove heavy motor lorries or threw bombs at the Bulgar. It all seems to show that the English beauty is essentially masculine. Take a likely looking young man and dress him up suitable and he makes quite a pretty women."

But in my opinion, that rather torturous logic is a person trying to convince himself that he could not be attracted to another man. There's a famous scene from Jean Renoir's masterpiece Le Grande Illusion which I think does a great job conveying the intense sexuality of these performances, which were very homo-erotically charged. The war in general disrupted "regular" sexual relations in Europe, by removing men from home and putting them in a new social world which revolved around their all-male comrades. Men on the front-lines necessarily had very intense and complex relationships with one another, relying on each other with their lives, living in close proximity to one another, taking care of one another. In this shattered world, men could practice and experiment with behaviors that would draw condemnation at home, but which helped them survive in the trenches.

Drag performances in part functioned as a public catharsis for the uncharted sexual territory of the war; they made it OK to feel love and attraction to another man by having him dress as a woman. It allowed men to rationalize that they were fully heterosexual after all. But conversely it also created a space where it was acceptable for men to escape the strict rules of Edwardian heterosexual behavior, giving them a space where homoerotic intimacy was not only tolerated, but accepted through the presence of officers, and celebrated by being fun. Drag performances were a place where soldiers could briefly blur the usual lines of gender behavior.

But homosexual behavior and drag performances were only tolerated in the topsy-turvey world of the front. Elsewhere, society deemed drag worryingly transgressive of "proper" gender norms. Take the example of Victor Wilson, who attempted to proposition some fellow British soldiers in Dundalk in June 1918 while wearing drag. A soldier on his own might have said yes, but unfortunately the three men together notified the authorities and helped arrest Wilson. Tabloids ran the story as a shock piece: "IN FEMALE ATTIRE / MASQUERADED AS GIRL TO HAVE FUN WITH SOLDIERS." But on the front, where the strict gender spheres of Edwardian life had temporarily broken down, such behavior would have been accepted and even, at times, celebrated.

Sources:

Alon Rachamimov, "The Disruptive Comforts of Drag: (Trans)Gender Performances among Prisoners of War in Russia, 1914–1920. The American Historical Review, Vol. 111, no. 2 (2006): 362-382.

David A. Boxwell, "The Follies of War: Cross-Dressing and Popular Theatre on the British Front Lines, 1914-18," Modernism/modernity 9, no. 1 (2002): 1-20

Jason Crouthamel. An Intimate History of the Front: Masculinity, Sexuality, and German Soldiers in the First World War. New York: Palgrave MacMillan, 2014.

Justin Fantauzzo and Robert Nelson. “A Most Unmanly War: British Military Masculinity in Macedonia, Mesopotamia, and Palestine, 1914-1918.” Gender & History 28, no. 3 (2016): 587-603. (This article has quotes on cross-dressing on theaters besides the Western Front, but I don't think the authors do a good job analyzing it. They buy into the cognitive dissonance that soldiers expressed and don't see the drag performances as homoerotic, whereas I do.)