While hell may not seem funny at first, the more you think about it the more amusing it becomes. If you think that hell is a dark depressing painful place then it's your loss. As a result of thinking that hell is funny, you can begin to compare other things to the hilarity of hell. Say you saw someone stub his or her toes you might think, "that's as funny as hell!"

Of course if you were the one to actually stub your toe then you might think the same think, only in that case "as funny as hell" would have a vastly different meaning. If you don't find hell funny, then you can compare all the other unfunny things in this world to it. "Well my wife just got her head cut off, that's as funny as hell" is a good example of this use of the phrase in this context.