How should I be handling my theme version numbering?

It is good practise to use semantic versioning e.g. 1.0.1 MAJOR.MINOR.PATCH

  1. MAJOR version when you make incompatible changes,
  2. MINOR version when you add functionality in a backwards-compatible manner, and
  3. PATCH version when you make backwards-compatible bug fixes.

Don’t update the version on every code commit in git (just do it manually), rather on every group of features that are implemented/shipped as a release for the theme. Hope that helps!