How to emulate USB devices?

Edit: Proof of concept here

I strongly recommend this project, USB IP. It is a way of connecting USB devices over the network. There is a Windows client.

What this means is, you install the client on your Windows computer. This device then expects to talk to a USB device connected to a Linux computer, the server: diagram over how a USB IP client connects to a USB IP server

What you now do, is either create a fake device driver for Linux, that looks like is connected to a physical USB device, but in reality is just logic pretending to be your USB device. There are tutorials for writing USB drivers for Linux. Or you create your own stub driver for the Device Control Manager (see picture above). This stub driver could run on Windows or Linux, it wouldn't matter. It could even run on the same Windows machine which is the USB client.

The DSF USB Loopback Device mentioned in the question itself, would be the same kind of solution as a stub driver for the Device Control Manager, but taking Linux out of the picture altogether.

You can write virtual USB device using QEMU. You can duplicate already existing device, like the dev-serial.c found in this QEMU repository and change it for your needs.
After you write and compile your USB device you can simply attach it to your VM using the QEMU command line interface.