How to transfer an iPod to a new owner

If you connect it to iTunes and select the device there should be an option that says reset or format device. If you select this option all data will be removed allowing the new owner to use the iPod with their computer and music library.

Plug it into your computer and start iTunes. When you select the iPod from the list of libraries on the left, there should be a button to restore to factory settings. That will wipe everything from the iPod.