I don't think blacksmithing is bugged (in your scenario anyway).
What is happening is that the weapon you are creating (blacksmithing) at level 5+ is receiving the highest damage boost the weapon can get right off the bat.
There are 3 tiers of damage boosts (low, medium, high). This game does not stack affixes so once you get the highest damage boost affix on the weapon the whetstone will not work, since it basically adds a low to medium damage boost depending on your blacksmithing level.
If you get a +stat affix (like say +1 strength) instead of a +damage affix, however, then the whetstone will work
And yes, according to the excel crafting sheet that's been posted, it seems crafting and blacksmithing benefits cap out at 5 currently.
Last edited by HauntedPast; 05/07/14 07:54 AM.