If you take $\theta(\xi)$ as you said, (with $\theta(0)=1$):
$$\theta(\xi):=\begin{cases}
1, & \xi\geq0\\
0, & \xi<0
\end{cases}$$
It will be a regular function (not a generalized, like $\delta(x)$), and there is not any reason to think about it unusually. so the relation holds:$$[\theta(\xi)]^2=\theta(\xi)$$
For the case of $\theta(0)={1\over2}$ as other answers say, $\theta^2(0)\neq \theta(0)$.
But if you define it as :
$$\theta(\xi):=\begin{cases}
1, & \xi>0\\
\text{undefined},& \xi=0\\
0, & \xi<0
\end{cases}$$
I will show that again$[\theta(\xi)]^2=\theta(\xi)$. As a generalized function, $\theta(\xi)$ will be defined through the following relation (where $g(t)\equiv\theta(\xi)$) :
$$\int_{-\infty}^{+\infty}\phi(t)g^{(n)}(t) dt=(-1)^n \int_{-\infty}^{+\infty}\phi^{(n)}g(t)dt \, \,\,\,\,\,\,**$$
where $\phi$ vanishes at $\pm \infty$.
If $g^2(t)=g(t)$, you must have:
$$\int_{-\infty}^{+\infty}\phi(t) {\frac{d^n g^2(t)}{dt^n}}dt=(-1)^n\int_{-\infty}^{+\infty}\phi^{(n)}(t)g(t)dt$$
We denote ${\frac{d^n g^2(t)}{dt^n}}$ with $f(t)$ for simplicity:
$$\int_{-\infty}^{+\infty}\phi(t) f(t)dt=(-1)^n\int_{-\infty}^{+\infty}\phi^{(n)}(t)g(t)dt\, \,\,\,\,\,\,***$$
The right hand side is simply equal to $(-1)^n\int_{0}^{+\infty}\phi^{(n)}(t)dt=(-1)^{n-1}\phi^{(n-1)} (0)$.
Now, we use the $**$ equation with $g(t)=\delta (t)$:
$$\int_{-\infty}^{+\infty}\phi(t)\delta^{(n)}(t) dt=(-1)^{n}\phi^{(n)} (0)$$
we conclude that in the left hand side of $***$, $f(t)$ must be the $(n-1)\text{th}$ derivative of $\delta (t)$, which implies ${\frac{d^n \theta^2(\xi)}{d\xi ^n}}={\frac{d^n \theta (\xi)}{d\xi ^n}}$ or $\theta^2(\xi)=\theta(\xi)$.