This might be a dumb question to some of you but it's an issue for me. When I work with marshmallow fondant. I make it a day or two ahead, then I knead before use. No biggie.

BUT if I add color, it takes a lot more kneading. By the time my fondant is the proper color with no streaks, I've got a really stretchy mess. It's too soft. I added over 1/2 a cup of powdered sugar to try and bring back the consistency, but it's just not working.

I added color, but not so much as to make it need a huge amount of dry ingredients to get it back.

So... I'm guessing if I just let it sit, it will sort of stiffen back up. My question is, how long would I let it sit before I can roll it to cover my cake?

And... I know many of you must have this issue, so how do you compensate for the softening from kneading and coloring your fondant when you have a cake to cover?

I color my fondant as I am making it. It is much easy and you can avoid using to much gel coloring which will cause you problems with the fondant tearing and cracking. Another suggestion is to airbrush your fondant or you can paint your fondant with thinned out gel coloring.
But I have had your issue before and I had to wrap my fondant back up and let it sit for awhile because the kneading had softened it up to much. Just don't let your fondant sit uncovered because that will cause a different problem and that is dried up fondant.

I don know which recipe do you use, but I am sure you have to add water to the marshmellows, you can add the color to the water and the color will be mixed with the marshmellows.

If you CAN, mix the color in the water before you put the marshmallows in the microwave. If not, then yes, your fondant will be a bit more stretchy, and you will need a bit more PS. But if you let it sit again overnight (with the added PS) then it might firm up by the next day.