With a few Google searches I came across a post to the Xchat forums and it was the answer I needed. First we will need the Xchat source.

$ wget http://www.xchat.org/files/source/2.8/xchat-2.8.2.tar.bz2

$ tar xjf xchat-2.8.2.tar.bz2

Next move into the fe-gtk directory and get the patch. Then compile and install.

$ cd xchat-2.8.2/src/fe-gtk

$ wget http://www.regicide666.com/xchat-alpha.patch

$ patch -u < xchat-alpha.patch

$ cd ../../

$ ./configure

$ make

# make install

When you start Xchat go to Settings -> Preferences and check Transparent Background. To set the background color in the Preferences menu select the Color tab and change the Text Colors Background option.

Not to shabby and it looks much better on your desktop. Check it out here. http://ww.regicide666.com/xchattrans.png