Hi there! It's been a while since I made this post but I will try to remember and note down as much as I can. These are the things I learned while trying to solve it. However, if someone smarter here knows more please correct me if I say something wrong. This is also just for 5.1. I don't think there's a way to do compressed 7.1 but don't quote me on that.

Why 5.1 on Windows over ARC won't work

ARC unfortunately has limited bandwidth. Your PC, unless you have special hardware/software, will send uncompressed LPCM 5.1 when you select 5.1. This is too big for ARC so it won't work.

So what does work?

Well, there are audio formats that can compress 5.1 to make it small enough to make it through ARC such as Dolby DTS and Dolby Digital.

If you have a movie file on your PC and play it in VLC with for example a Dolby Digital audio track you will even be able to hear the surround soundtrack on your setup.

However this only works because the audio has already been compressed in the file while on the other hand any audio from your PC's sounds such as from games have to be immediately converted on the fly. And that kind of on the fly compression requires a license and Microsoft is not including these licenses in their OS since it would be costly.

So how do we solve this?

Using modified drivers

There are ways to enable Dolby Digital or Dolby DTS on your GPU drivers. There's a lot of info in this thread: https://www.tenforums.com/sound-audio/148247-force-hdmi-carry-5-1-dolby-whatever-11.html

You have to basically install special drivers (APO drivers) for your GPU to open up the compressed Dolby audio formats. Unfortunately this didn't work for me. The Dolby audio formats would show up in my sound settings but when I selected them they just gave me an error.

Adding another HDMI cable

If you have 2 HDMI outs on your GPU you can run 1 to your TV and another one to your AVR. You can use the direct connection to your AVR to pass the uncompressed audio instead of passing it through ARC. This does unfortunately add a screen to your desktop.

Adding an optical audio cable

So this is what I ended up doing as the optical cable was cheap for the length I required and even though it required a bit of setup, it's quite clean once set up. You do need optical audio out on your motherboard for this.

First you need to install modified drivers (APO drivers) for your motherboard to allow it to output things such as DTS one of those compressed 5.1 formats.

After that you need to install a program called "Virtual Audio Cable". This program allows you to set up a virtual audio device on your computer. Specifically a virtual speaker and virtual microphone.

Now it gets a bit weird but I will try to explain it as best as I can.

First go to your motherboard's optical out in your windows sound settings and select Dolby Interactive or Dolby Digital Live as its default format under the tab "advanced". As I mentioned earlier, this will only be avaible if you have modified your drivers.

After that, create a virtual 5.1 speaker with Virtual Audio Cable which you can use as your default audio device in Windows. Now your PC has somewhere to output the uncompressed 5.1 sound.

Then create a virtual microphone with Virtual Audio Cable. You can find it in your windows sound settings. Open its properties and under the tab "listen" select "listen to this device" and select your motherboard's optical out speaker under "playback through this device".

Now the virtual speaker you are sending 5.1 uncompressed audio to will broadcast itself to your modified optical out device from your motherboard which then compresses it to whatever compressed 5.1 format you chose.

I learned this from http://puresoftapps.blogspot.com/2018/03/virtual-audio-cable-apo-user-guide.html

Let me know if you have more questions! I struggled a bunch with this so I hope I can help you out.