That one can’t be removed but it looks like you can manually defragment specific files with the “contig” utility as described here: https://notes.ponderworthy.com/defragment-the-ntfs-mft-and-other-hidden-crucials-in-live-windows
Hopefully that will get you further!
40 GB is pretty rough and personally I’d say about 120 GB is the lowest if you want some wiggle room without needing to frequently tinker with finding free space. But 500 GB is way more than necessary at least for now.