Which source to use when reporting the current altitude to ATC?
When asked for altitude, you report the altimeter reading, utilizing the correct barometric pressure entered into the Kollsman window.

ATC separates traffic based upon indicated altitude.  The indicated altitude may include errors, such as the pressure ATC provides, but all aircraft in the area will presumably be using the same barometric pressure, and will have similar errors.

GPS altitude, which some call an absolute altitude, is an altitude relative to a model, normally the WGS84 elipsoid, and has it's own set of errors.

By convention, indicated altitude, based upon local pressure, is used for aircraft separation.