That is a UI bug, and totally my fault. The reason we never caught it (and you are the first to report it AFAIK) is that XRefs were forbidden at Frantic Films where Krakatoa was originally developed.
Thankfully, the existing Matte Objects rollout of Krakatoa does not force you to use its own Selection Set, you can select the XRefs and create your own Named Selection Set by entering a custom name in the “Create Selection Set” field of the 3ds Max Main Toolbar. Then just add that name to the Matte Objects Named Selection Sets list of Krakatoa. I just tested this and Krakatoa itself does not mind rendering the XReffed object as Matte.
I have fixed the UI test to account for XRef Objects containing geometry. If you want to know how to fix the UI yourself without waiting for us to release the next update, please let me know.