Someone just told me about this interesting discussion going on, and I´d like to weigh in on it a little.
Yea, that's why Wuxing and Daoists were enemies in Legend of the Qin. I mean it took a mountain of artistic liberties, but the theme was not without merit.
In fact, they remarked that Wuxing was falling out of favor.
After the fall of Qin, Mohism is dead, School of Agriculture also dead (despite being ardent supporter of Han) while Confucianism took the mantle and absorb the two teaching + legalism as framework. (Han hates legalist) Daoism went to absorb the Wuxing school and then Buddhism is rising again (Qin hates Buddhism).
Which is how you see Confucianism, Daoism, and Buddhism as three school of Xianxia. Those are what most people know currently.
While I believe you´re correct about Daoistic and Wuxing schools fusing together, and the Han dynasty expressing Confucianism in a very legalistic way, it must be noted that Buddhism didn´t actually exist in the China during the Qin.
The current main scholarly consensus is that Buddhism entered China during the first century A.D., i.e. the Eastern Han. It probably was spread by Buddhist missionaries travelling along the silk road.
At first it was sometimes seen as some sort of variation of Daoism, but people began to realize that it was something separate rather quickly. What helped Buddhism´s spread was, amongst other things the lack of a central government after the fall of the Eastern Han.
Nevertheless, Buddhism came to be criticized as an un-Chinese religion/philosophy by quite a few intellectuals in the Chinese areas: shaving off your hair, not propagating your ancestral line, living away from society were all things they considered anathema to traditional values. At least up to the Song dynasty, there have been several suppressions of Buddhists (which mainly consisted of monasteries being closed, losing all their possessions, and monks being forced to become laymen again)
However, in the end, (Chan) Buddhism remained part of Chinese society and, by the the time of the Ming dynasty, was considered one of the main three teachings of China, alongside Daoism and Buddhism. By that time, all of these three teaching had been influenced by each other to at least some degree. (e.g. Neo-confucianism developing metaphysics inspired at least partially by certain Daoist teachings)
The frameworks often used by Wuxia and Xianxia authors have their origin mainly in the Ming and Qing dynasties, rather than in the earliest ones. It was during this period that some of the most famous and influential Chinese novels were written, such as Water Margin and Journey to the West. (Another example: the earliest example of Shaolin monks actively practicing martial arts date from the Ming)
Of course, Xianxia novels today are based upon distorted interpretations of earlier xianxia novels, which are based upon a chain of distorted interpretations of later Daoist/Buddhist-like teachings.