I'd appreciate advice on whether or not a receiver upgrade would make any difference, or if I'm already at the point of diminishing returns.

First, my overall setup - some of you may find this very interesting (and pure audiophiles may want to stop reading now!).

I have a strictly stereo M3v2 set up, and overall I'm extremely pleased. I have many hundreds of hours of classical music on my pc - all mp3 at bit rates from 192k to 320k. And I listen to a fair amount of classical internet radio. I connect my usb sound card output to the aux-in of my receiver.

Due to speaker placement issues, I use ffdshow software on my pc to lower one speaker's input by 6db, and I also mix/blend the l/r channels somewhat to reduce stereo separation. I also use Breakaway Audio Enhancer software from Claesson for multiband agc and loudness. The overall results are very, very good. Perhaps not up to strict audiophile standards, but even well encoded 192k mp3 is highly acceptable, and the overall set-up definitely provides serious listening enjoyment.

This brings me to my question. I'm using an older JVC receiver, with nominally 80w per channel. I know this brand is not that highly regarded. Would there be an appreciable difference with the Sherwood RX-770, for example. Or, since the sound card has S/PDIF TOSLINK capabilities, should I opt for a receiver with this kind of input? Or, have I already reached the point of diminishing returns with a set-up I quite enjoy?

IMHO, I think if you are happy now then why change? You could simplify the process by moving to a receiver with SPDIF input but other than that I see no reason to change for the sake of change.

Having said that there is a possiblity you may find an improvement moving to a Sherwood or simialar grade reeiver over your JVC. This improvement might be similar to how some of us found better sound by upgrading from Sony avr's.

I think upgrading from the sound card's line outs to a digital input into the receiver should improve things too, unless you have a really nice sound card. Plus you could do the volume balancing (and delay if needed) in the receiver.