i can't find a way to kill him without turning everyone hostile.
i tried using gas grenades but he will immediately remove it (still possible before patch).
i tried selling it to him but the item is nowhere in his pocket to steal it back.
i even tried to kill him after i sold it, but the item is still nowhere in his body.
i think it's Styg's way to prevent cheating to win money+item.
but i personally prefer unique gears to add up to my collection, his armor looks perfect on me with Mephisto as my name.
as for money, you can always make money, one way or the other.
so yeah, i refused to sell it. my tip for killing him in the basement is to fire the Ethereal Torch around his spot as soon as you landed on your tele-glyph, you'll know why.