How do you create a virtual network interface on Windows?

@Tim
Depending on the licensing you might be able to use the TUN/TAP driver that is part of OpenVPN, see here for details.

You can do this on XP with the Microsoft Loopback Adapter which is a driver for a virtual network card.

On newer Windows version: Installing the Microsoft Loopback Adapter in Windows 8 and Windows Server 2012