Pennies are indeed considered currency and legal tender, worth 1/100th of a dollar.

In regards to defacing:

United States Code
TITLE 18
PART I
CHAPTER 17
§ 331. Mutilation, diminution, and falsification of coins

“Whoever fraudulently alters, defaces, mutilates, impairs, diminishes, falsifies, scales, or lightens any of the coins coined at the mints of the United States, or any foreign coins which are by law made current or are in actual use or circulation as money within the United States; or whoever fraudulently possesses, passes, utters, publishes, or sells, or attempts to pass, utter, publish, or sell, or brings into the United States, any such coin, knowing the same to be altered, defaced, mutilated, impaired, diminished, falsified, scaled, or lightened— Shall be fined under this title or imprisoned not more than five years, or both.”

The melting of coins is also illegal.

So it would appear that defacing a penny is considered illegal, but many have interpreted "fraudulently" as the key factor in the intent of such alterations.

It certainly would be illegal to try to change a nickel into a quarter, or a $1 bill into a $10 bill. However, there are many instances of people turning coins into jewelry, crafts, or souvenirs with no fraudulent intent.

(see Coins and Currency)