it-manIt is not. It's illegal to use defaced currency though. Think about those machine that smash, squish, and alter pennies at different amusement parks, zoos, landmarks, etc. They aren't illegal, but once the coin has been transformed, it can not be used as legal tender.
ZxcckklOk, the long answer:
You can redeem a bill for its full value if more than 50% of the note is identifiable as U.S. currency, with adequate security features intact. (Security features include various embedded threads that glow in UV light, watermarks, and color shifting numerals.) Alternatively, if less than 50% of the note is identifiable or present, you must provide evidence demonstrating “to the satisfaction of the Treasury that the missing portions have been totally destroyed.”