Try this:
Set your windows audio output to the maximum available (24bit 192kHz). Restart computer.
Open VLC and:
Tools ---> Preferences ---> Audio ---> Output Modules ---> MMDevice ---> "HDMI/SPDIF audio passthrough" to Enabled. Restart VLC.
You may also need to fiddle with the receiver to set it to "Direct", "Just Play", "Digital" or something like that
Now try play the file in VLC and see if the light comes on
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It's so stupid because the rest of the planet has moved on from compressing audio to outputting raw audio data to the amp. You dont need a DAC if your PC can do all the decoding and ouput the analog audio signal.
In your setup, your amp is actually a DAC and amp combination. What you are trying to do is pass the compressed atmos/dolby/trueHD/insertAudioFormatHere as a bitsream down the digital link over SPDIF over an optical cable in the hopes your amp's DAC can decode it properly.
SPIDF is like 20 years old. It is just a protocol to send a single digital stream down a pair of wires / an optical cable.
Atmos/TrueHD/etc. are compressed audio formats, like mp3 or aac. The digital stream needs to be uncompressed by the DAC to make audio for the amp to play.
This is why HDMI is 1000x better and is the defacto standard for playing audio. You have a huge amount of bandwidth to send 32 raw adio chanels at up to 192 kHz at 24 bit - and that is just the audio, not the video. SPDIF is two 192 kHz channels at 24 bit.
It is 2020. We isolate power supplies for sensitive equipment. We dont need to decouple audio equipment from eachother like we used to be forced to. SPDIF will go on to be a niche protocol and the rest of us can use HDMI as was intended
