"Everyone's...already dead" seems like an extremely tactless thing to tell Sasuke, especially when Sasuke is already upset. With this line, Kakashi essentially told Sasuke that he doesn't care about Sasuke, or at least implied it.

The trauma and pain behind Kakashi's line shouldn't be overlooked; Kakashi lost his team members one by one and feels that he has no one left. So even 13+ years later Kakashi is still soaking in his grief, to the point where he has become lost in the depths of that pain and he doesn't see a way out of his grief. Kakashi is mired in apathy and indifference that have left him dispassionate and disinterested in life or in other people. Even now Kakashi struggles to find any ambition or dreams to give life meaning. Kakashi's PTSD and possible depression led to him handling his grief in a very unhealthy way.

If everyone important to Kakashi is already dead, that means Naruto, Sakura, and Sasuke aren't important to Kakashi and they don't matter much to him, because according to Kakashi, even if the three children were killed it wouldn't hurt him. Here he himself says the three genin's deaths wouldn't affect him or cause him much pain, because in his words, everyone he loves is already dead.

So much for caring teammates. No wonder Team 7's grasp of teamwork is presently so fragile and hanging by threads: even their own sensei doesn't care about them and he has no shame in outright saying so.

Sasuke is already grappling with severe low self-esteem and self-worth, feeling like he's pathetic and weak and worthless, and no one has interest in him anymore now that he's recurrently proved an inept failure and incompetent disgrace to his clan. His own brother cares more about Naruto, and even Sakura's interest has shifted some from Sasuke to admiration for Naruto. At this critical time when Sasuke needs to be told that he matters and is valued, Kakashi tells him that he isn't.

Instead, Kakashi tells Sasuke that Sasuke isn't personally important to him, and the deaths of neither Naruto, Sakura, nor Sasuke will not significantly pain him, because everyone he loves is already dead.

It proves Kakashi hypocritical, since Kakashi is asking Sasuke to do something that he himself won't do. Kakashi isn't very invested in his own team, so how can Kakashi expect Sasuke to treasure his comrades if Kakashi won't do the same?

This line isn't quite the epic "gotcha" moment that most fans seem to think it is, like the fact that Kakashi also has a tragic backstory proves how out-of-line a massacre survivor still unrecovered from horribly traumatizing and mentally damaging torture is for acting out because he's feeling upset that he's the last of his clan and that his people's killer is still out on the loose.

Kakashi's tragic circumstances don't negate Sasuke's own suffering. The fact that Kakashi had a rough life does not diminish, decrease, or lessen Sasuke's pain in any way whatsoever. It just means that there's more suffering to go around. Which admittedly knowing he's not alone in his suffering could help Sasuke depending on the situation and how Kakashi presents it, but it's hardly a "gotcha" moment showing what a pathetic crybaby Sasuke is because several hundreds of people he knew and cared about were slaughtered in a mass killing, including his family, children, babies, the elderly, and noncombatant civilians. It's silly to think that Kakashi has it so rough that everyone else's suffering doesn't matter and no one should ever feel sorry for themselves again after the horrors Kakashi went through because Kakashi can smile at the same time when he says that everyone he cared about died.

The fact that Kakashi is suffering greatly doesn't mean that Sasuke isn't suffering. Sasuke has a right to be upset, and so does Kakashi.

Sasuke is upset, angry, hurt, distraught, and in desperate need of emotional help and support, yet Kakashi makes this moment about himself. If Kakashi wants to talk about his tragic backstory, that's great, his three students should all hear about his rough and troubled past sometime so they can understand the great hardships that their sensei went through. But that time isn't now, and a grown man using a moment like this to focus the attention on himself with a "woe to me, look how rough my life is and you didn't even realize" is distasteful. Kakashi needs to save his problems for a fellow adult, not dole them out to a young kid who already has a million problems of his own and doesn't need to deal with an adult's personal issues too.

It's ironic Kakashi is so heavily praised for smiling here by fans, because arguably, it was even his biggest mistake in this whole conversation, and Sasuke and Kakashi's reunion in Shippuden only further solidifies that Kakashi smiling while talking about the loss of deceased loved ones only was alienating to Sasuke and pushed him further away.

Personally, I find Kakashi's smile here to be badly misplaced and alienating and frustrating too. Kakashi's closest friends died, yet he's smiling during a serious conversation about something very tragic and sad. Which isn't an inherently bad thing to do depending on the particular moment, character, and scenario. But in Kakashi's case, plastering a smile on his face when talking about the gruesome deaths of his loved ones seems like a pointless facade to project. For Sasuke, it's alienating, too foreign, and completely unrelatable, and thus entirely unhelpful to him. It's Kakashi speaking an emotional language Sasuke doesn't understand, nor one that he ever would want to understand even if he could. Losing people you care about causes grief and sorrow, not pleasant smiles. To pretend that everything is fine like their loss doesn't affect you or impact you at all isn't something that is going to reach Sasuke, it's only going to push him away. I myself view Kakashi's smile here as off-putting in its insincerity. I don't like when people force themselves to pretend to be happy when in reality they're dangerously miserable. Such emotional repression can be incredibly unhealthy psychologically speaking and also makes things difficult for other people who might not realize there's a problem or aren't sure what the problem is. Putting on a brave face is good and admirable in the right context, but sometimes situations call for vulnerability and honesty, and this was one of them, yet Kakashi kept up the fake cheery facade when he needed to be sincere and open instead.

Kakashi smiling while talking about his dead friends isn't helpful to Sasuke; it's frustratingly alienating, almost taunting. Sasuke is an innately more serious and grim person, which means he needs people to communicate and interact with him on a serious level. Not all of life's trials can be brushed off with a smile and a laugh, and Sasuke needs others to meet him on this level by taking his feelings seriously by matching Sasuke's more grave, solemn, and somber demeanor.

It isn't helpful to tell Sasuke to brush off the deaths of his dearest family and friends like it's nothing and smile, acting like their deaths never affected or impacted him at all. The Uchiha clan's deaths deeply impacted Sasuke and his family is an intrinsic to his identity and who he is and they will always be a part of him. Sasuke even later tells Itachi, "What, I was supposed to happily walk that one path, ignorant of everything? I couldn't. I never could've walked that path!"

Everyone in Sasuke's life wants him to get over his grief already, treating Sasuke like he shouldn't be upset that everyone he ever knew and loved is dead, everyone acts like a massacre isn't that big of a deal and Sasuke is overreacting. Kakashi here embodies the pinnacle of that: not only should Sasuke not be upset about his clan's genocide, he should learn to smile about it and move on.

Furthermore, Kakashi tells Sasuke that all Kakashi's precious teammates are already dead. After losing his closest friends, all this time later, Kakashi still hasn't found new loved ones to fill the hole left by ones he lost. Which seems like a weird thing to emphasize when Kakashi tells Sasuke he should treasure his teammates and be happy with them.

Kakashi has told Sasuke that he shares his pain of having no one he loves left, but Kakashi is inferring that things don't get any better from here. If Kakashi hasn't been able to move on from his loss and find new friends in all that time, than couldn't Sasuke assume that the same may hold true in his own tale as well? Any new friends he makes will never be anywhere near as good as his old friends, so is there even any point in trying to befriend others to fill the hole left by the family he's lost if it will never make the lonely misery go away? Because evidently that hasn't worked for Kakashi. Having a new team has done nothing to help Kakashi overcome the pain of his loss, so the inference is that Sasuke's situation will never get better either, nor will he ever find friends to replace those he lost. Sasuke has hit rock-bottom and although unintentional on Kakashi's part, Kakashi is basically reinforcing that it won't get much better, or at least things will never be as good as they were before and Sasuke could never regain any semblance of the strong bonds he lost; anything new gained would always be a mere shadow of what he'd lost.

Sasuke and Kakashi are drowning in the same issue: they are both blind to the friends they have in their team. Both are so consumed with soaking in the trauma of their past that they aren't able to move on. They are both so stuck in their pasts that they can't see the possibility good times and friends they have in their teammates. Kakashi is still too caught up in the loss of Team Minato to believe that anything else will be anywhere near as good as his old friends, and Sasuke is still too obsessed with his ties to his family and clan to believe it's okay to have loyalty and friendship to anyone else.

Instead of nebulously alluding to "everyone I love is already dead, so now I don't have anybody I care about left living", Kakashi should have drawn specific parallels between his and Sasuke's rough lives. Kakashi might have mentioned his own struggle with his family relationships by relaying the story of how one day he'd come home to find his father's corpse and how after that he'd felt betrayed and resented his father for a long time: "I don't understand what you're going through, but I understand how it feels to be let down by a family member and feel betrayed when they leave you behind. I know what it's like to have no one left..." Then Kakashi could tie it back to how Kakashi thinks of Team 7 as his new family now, and protecting his new family has become his new purpose, and thereby encourage Sasuke to look within himself and see if he might feel the same.

Of note is that initially Sasuke looks hacked when Kakashi says that he doesn't have anyone special left. I think it's partly that Sasuke doesn't like being contradicted.

As I mentioned in the previous chapter, Sasuke isn't truly expressing an actual aggressive desire to kill Kakashi's loved ones. Rather, Sasuke is angrily vying for empathy and understanding, so he's hacked when Kakashi responds coolly and calmly, not reacting to the threat of his loved ones, rather treating such a threat with apathetic indifference. Perhaps Sasuke assumes that Kakashi is brushing him off, being purposefully contrary, or condescendingly treating him like a little kid. And perhaps some of the agitation also comes from the fact that Team 7 isn't included among those special to Kakashi, which is hurtful.

But after Kakashi reveals that all his most precious friends have already been killed, Sasuke reacts with genuine shock and his expression shows that he feels terrible.

Anyway, despite their tactless nature, I'm surprised how much Kakashi's words impacted Sasuke regardless. Sasuke instantly dropped his anger which was instead replaced with a listless, thoughtful, and sorrowful sadness and he actually starts to listen seriously to his sensei after that revelation.