I don’t believe it is illegal to deface money unless you are doing so in an attempt to defraud the receiver. Can anyone out there quote the applicable statute?
According to "Money Facts," at the Bureau of Engraving and Printing's website, the "defacement of currency is a violation of Title 18, Section 333 of the United States Code. Under this provision, currency defacement is generally defined as follows: Whoever mutilates, cuts, disfigures, perforates, unites or cements together, or does any other thing to any bank bill, draft, note, or other evidence of debt issued by any national banking association, Federal Reserve Bank, or Federal Reserve System, with intent to render such item(s) unfit to be reissued, shall be fined not more than $100 or imprisoned not more than six months, or both. Defacement of currency in such a way that it is made unfit for circulation comes under the jurisdiction of the United States Secret Service. Their mailing address is: United States Secret Service 950 H Street, NW Washington, DC 20223.
If you might think your money is yours to do with as you please, you're not quite right. The federal government has a statute that specifically prohibits mutilation, cutting, disfiguring, perforating, and other acts that are intended to make the bills unable to be used. The U.S. Secret Service is responsible for enforcing the law.
Penalties
If you're convicted of defacing U.S. bills or coins, you can face fines, jail time, or both. For bills, the maximum fine is $100 and the maximum jail sentence is six months. For coins, the jail sentence can be up to five years. To be convicted, you must have the intent to defraud someone. For example, the U.S. Mint warns that wearing down edges of coins to make them appear to be error coins -- coins that are incorrectly struck by the U.S. Mint, often rare and popular with collectors -- and then selling them to collectors as error coins constitutes a crime.
Well, since you asked, from https://www.wheresgeorge.com/faq.php :
“The law defines ‘illegal’ defacement as defacement that renders bills unfit to be re-issued.”
There’s then a link here: http://www.moneyfactory.gov/resources/lawsandregulations.html
(scroll down a bit, the site backs up wheresgeorge.com)
The Treasury then refers one to Title 18, Section 333 of the United States Code.