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Yes, you must file a W-2G return in the state in which you are a non-resident and in which the casino is located and report your gambling winnings. You must also claim the winnings in your home state. You might be able to claim a credit in your home state if you pay taxes to another state.
No, it is not illegal to gamble with a VPN. By using a VPN to access gambling sites, you are simply protecting your online traffic from being tracked and ensuring that your personal information is kept secure.