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To be 100% legal you would have to report all winnings and losses... these would net to zero in a break even situation, obviously.
Assume you report no winnings and deduct no losses on the grounds that you "broke even." The IRS could get you for filing a false return. But they are clearly not going to go after people who don't do this, as there is no tax to collect in any event. No profit=no tax
The real problem here is that in Illinois there are no itemized deductions. The IL return just picks up your adjusted gross income from the 1040 and gives you a few limited deductions. So if you were 100% honest on the federal return and reported, lets say $100,000 of winnings and $100,000 of losses (no net federal tax), the state of IL would ignore the losses and consider you as having $100,000 in additional income, taxed at 5%.
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