I'm an H&R Block tax preparer and here's my take:

First, gambling income (all of it, not just net), goes on the front of Form 1040 as "other Income"). Losses, up to the amount of winnings, are deducted on Schedule A IF taxpayer itemizes. If you don't itemize, you don't get to deduct your losses. Hardly seems fair, but that's the law and only Congress can change it. Also, if you are going to deduct losses, you'd better have damn good records. Date, place, time, game, etc. For more information, see IRS Publication 17, available online at www.irs.gov. Now to the individuals:

Legally, Chip Leader has to report the $750 less buy-in as income. It looks like he doesn't intend to do that, but sooner or later the IRS will get wise. Chip Leader doesn't need any paper from the Taj to declare his income. He just needs to enter it on Form 1040, deduct any losses (if he itemizes) on Schedule A, and calculate the resulting tax.

The person with the paper is in a pickle. You are right that, on the surface, he may very well owe more tax than he won (depends on his bracket). If he sat down at my tax desk I would want to go over all his gambling records (hopefully they will pass IRS scrutiny) to make sure we reported all his income and deducted all his losses. As far as this particular "win" is concerned, I would advise him to declare his net win and submit an accompanying statement fully explaining the chop.

The above discussion applies to individuals who are not professional poker players. If poker is your business, rather than a hobby, different rules apply.

As Ed Miller pointed out in the November (I think) issue of 2+2's online magazine, the day is coming when the IRS will start to look closely at all the money being made by poker players.