Coins that are "mutilated," meaning chipped and not machine readable, can be redeemed through the U.S. Mint.
"Uncurrent" coins, which are damaged but still machine countable, can be redeemed at Federal Reserve Banks.
Mutilated coins sent to the U.S. Mint are melted down to make coinage strips.
Find the answers to more coin questions at the U.S. Mint FAQ.
For more coin information, read GovSpot.com's Cool Currency article.