Even with the knob turned all the way to the lock position the 3pt hitch still leaks down. It leaks quite a bit slower but still leaks down. I did notice the hydraulic filter housing is leaking a little at one of the o rings. Could that possibly have anything to do with the 3pt hitch leaking down or is that system closed off or separate from 3pt hitch by a valve or something?
The valve does two things. One is it regulates the rate the implement drops when the 3pt control lever is pushed forward. The other is that when it is turned all the way in clockwise it blocks off that path entirely and the arms stay up no matter what you do with the 3pt lever.
So if you had closed the valve and the arms stayed up we we would have known the problem was in the path involving the valve and the 3pt control....not the piston. But since it still leaks down it could be either one - or both. I'm betting it is both.
And because closing the valve did slow the leak a little, that tells you it needs attention. I would probably rebuild that valve first. It is simpler to do & usually just involves taking out the valve assembly apart and replacing a couple of O rings, some packing, and cleaning up the orfice.
If you are real careful taking it apart a good cleaning will be all it needs to get dirt & rust out.
It wouldn't surprise me if you still will need to fix a problem in he piston seal to the cylinder - Tractor Tech has already given you some good info on that. Lots of time a leaky 3pt is traceable back to rust in the 3pt cylinder which eats up the piston O rigs and clogs up the drop rate needle valve.
As for the leaky filter, that is on the suction side. It doesn't directly affect the 3pt arms dropping. When the tractor is running is when a suction leak can suck air into the hydraullic fluid. Air in the fluid will make the fluid look cloudy or murky until the micro bubbles go away - usually takes overnight.
Suction leaks don't leak much oil to the outside when running, and small suction leaks don't cause the tractor to operate much different. That is what makes them hard to find. You find them as a small oil leak or more likely as a wet oily connection when the engine is off.
rScotty