Well here we are and I have encountered the same Issue. Disconnected the watch from Xcode, rebooted Xcode, rebooted the phone, the watch and everything else connected to the Mac. For some odd reason the watch re-paired to Xcode and initially there was a message on the Devices and Simulators saying that there was something wrong with the Tunnel (I've probably got that wrong but it was not happy) but then inexplicably the message Copying blah blah blah appeared in the Xcode devices window so now I am just waiting for that to finish. I'm now about an hour into this palaver and hopeful that I can finally update my App.

I have macOS Big Sur and this issue has been plaguing me since installing it on my MBP 16". The temporary solution, posted some time back in this thread, is to open Activity Monitor and search for the process coreaudio (it's called coreaudiod) and kill the process (Force Quit). It will restart automatically. This avoids having to reboot your Mac every time this occurs. Infuriating is an understatement.