That is a massive room. I would paint out the ceiling and level the floor around the hearth. The area is so big that you could add a sectional around the hearth and still do another seating area elsewhere.

Yeah, I see accidents waiting to happen...trip, fall into hearth head first, etc. Not just an active imagination, I’ve seen it happen twice. I’d level it also.

If I were you I'd go whole hog 60's/70's and make yourself an epic conversation pit out of that space.

Look up vintage conversation pit design for inspiration. Have fun with it and own it. How many of your friends have fireside conversation pits?? While I'm a giant fan of more traditional stuff (Victorian owner here), I still have lots of respect for period details from other times, especially more recent ones that tend to be removed or overwritten in the name of "updating". I'm all about respecting cool period details, regardless of whether the house was built in 1870 or 1970.

Also don't paint the ceiling.

Bob Newhart, Mary Tyler Moore? Cool. I'd play it up since there is so much living space to work with.

Here are some inspiration pics for you OP:

Now I kinda want a fireside conversation pit...

(PS: 3/4 of these pics have wood ceilings kinda like yours - I swear that was not on purpose)

Dare I say ‘sexy’?

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Muj uwas

OMG yes absolutely rehab this conversation pit! I agree with you idea of removing the ledge at the hearth, give more room for the sunken sitting area. Work with what you have as far as shape is concerned, don’t make it round. Embrace this unique space!

Your room has the potential to be quite beautiful, however, that truly tiny sunken corner -- so small -- and, especially with carpeting, just looks ... well ... more like a sales gimmick and stumble/tumble hazard than anything useful.

Consider removing the carpet and replace it with "slate" tile flooring that's the same as the darker color in the chimney -- and have your new flooring also cover the sunken area -- leveling your floor. You can recreate your hearth level with the new floor, too.

Definitely would not paint the ceiling.

first....the seating should be in front of the fireplace...not on the edges....and higher...next ....the sunken area should be equal distance from the hearth all around...matching the shape of the hearth....with maybe a step down at each end....also the tiny mantle that wraps around should be big and chunky....maybe only on the front?....lastly for the size of the room .....the sunken area may seem small...but for the seating it is perfect...a small sunken area with seating at the same height of the top of the hearth would be a people magnet...

ALSO...if the hearth was a big thick stone slab in black slate or marble it would be a striking focal point with the black fire surround...

Ultimately leveling the floor would be the most practical...safest...and easiest plan...saving the,pit would be interesting but limiting and quite a challenge to get it right...your house...choice is yours ,of course...

Is the main floor higher than the hearth level? It's hard to tell from the photos. Ideally, if the hearth and the main floor are even, I would fill in the sunken part to have one level floor all through the room.

The front door and the stone surrounding the front doors are even more dated than the sunken fire pit. I doubt that that particular kind of stone is still available. Thankfully.
Do you want to restore the house to its original style or change its style? We haven't been given enough information to come up with ideas or suggestions.

To me, it’s way too small, particularly in relation to the hearth which is on the tall side and thus feels imposing when one sits too close to it. I also think the present facing is better than the very dark stone you are proposing. I’d not worry about the stone and instead invest in new flooring (hardwood or maybe slate), and enlarging the pit, a lot.