Well, firstly online gambling is completely legal in the United States. The only place where the laws against online gambling take any effect are with banks making particular transactions. Individuals are still completely free to gamble or do whatever else they wish with their money online.
Second, yes you do have to pay taxes on it. If you have a full time job and you're making an extra $5,000 a year or so, then realistically, you have nothing to really worry about. But if you're making a lot of money playing poker, or if this is your full time job, then you're definitely going to have to report your earnings, just like any other job, lest you tempt fate and possibly face multiple charges of tax evasion, etc.
You are also correct about deducting money spent. You must keep very good records of what you're winning and losing so that if the IRS does in fact decide to look into you, that you can provide them something to look at. You will only be taxed on your total income for the year, i.e. your bottom line.
If you enter 2 tournaments for $10,000, 5 for $5,000 and 25 for $1,000, and win $115,000 over that time, you will only be taxed on the $45,000 profit you have made.