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The short answer is, it isn't.

The long answer is, under 18 U.S.C. 331, "Whoever fraudulently alters, defaces, mutilates, impairs, diminishes, falsifies, scales or lightens any of the coins coined at the mints of the United States... shall be fined... or imprisoned not more than five years, or both." Here the key word is fraudulently. It is illegal to tear it and piece it together to make it look like a $100, but it's not illegal to shred or burn it just for fun. It makes no actual mention of paper currency, but I assume "coins" is generalized to all currency.

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Q: Why is it illegal to deface a dollar bill?
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