My choice: HTML, because it offers more options and possibilities (along with CSS formatting).
What has always bothered me about the way, stories are archived in a plaintext way is the issue of linebreaks but also does it not allow any formatting of text at all. The archived stories vary from ~55 keys per line to over 70 and both values are too low for today's screen resolutions or too high for mobile devices.
On the other hand, having the stories archived in a HTML format is more challenging than one might believe at first. Color-themes and unfitting fonts are only one side of the problem. I've visited plenty of fiction archives that use some script software to aid authors and archivists in their work but more often than not, the sole benefits are for the creators and not readers. Because in the end, the way stories are displayed is marred by sidebars and other site features.
I'm rather fond of the story displays at fanfiction.net - because those can be directly imported from a word processor and therefore allow all formatting like bold/italics to be conserved.
Using HTML would also allow to comfortably modify your preferences, for example: if a HTML page is created on the fly by some script, you could save your preferences (background-color, font, font-size etc) in some cookie.
The filesize to download should not be an issue at all, because one can always modify the webserver to use compression or add some lines to a dynamic script. Then a 500kb story would only amount to (for example) 200kb anymore, despite using additional formatting.
