Title 18 , Section 331 of the United States code provides criminal penalties for anyone who fraudulently alters, defaces, mutilates, impairs, diminishes, falsifies, scales, or lightens any of the coins coined at the Mints of the United States. This statute means that you may be violating the law if you change the appearance of the coin and fraudulently represent it to be other than the altered coin that it is.
The key word is fraudulently. I take the law seriously, it helps protect us from counterfeiters, forgeries and many other unethical acts. Once altered, the coins I use are no longer referred to as currency, but instead as jewelry. You will not be able to use your new coin jewelry to purchase a Snickers bar at the local 7-11, that would be considered a fraudulent act. Think of the coin smashing souvenir machines at amusement parks and museums. If it was illegal to turn a coin into art, those machines would not exist.
Taken directly from the US Mints website: Can I make jewelry from U.S. coins? Yes, but your business should be careful not to imply any endorsement by or association with the United States Mint in its advertising and marketing materials.Can I melt, drill holes through, or mutilate U.S. coins? Maybe. It is a violation of 18 U.S.C. § 331 to alter a U.S. or foreign coin with the intent to defraud. The United States Mint cannot issue interpretations of criminal statutes such as this, which fall within the jurisdiction of the U.S. Department of Justice. Furthermore, 31 C.F.R. Part 82 states that no person shall export, melt or treat any 5-cent coin or one-cent coin of the United States. However, there are a few exceptions such as for novelty, amusement, educational, jewelry and similar purposes. Your business should consult with an attorney to ensure it does not run afoul of these laws before melting or mutilating U.S. coins.