So the device is jailbroken, and I'm trying to sell it so I'd like to update and wipe it. It works perfectly, all my apps, music, videos, etc. are on the device, and even after trying to flash it clean, restore from itunes, etc. the device still boots up just fine when I try and use it. It's the strangest thing.
When you perform the reset, do not "restore from backup", as iTunes will prompt you to do when it detects the "empty" device. Instead, press cancel, and your iPod Touch should be empty.
For the most security, you should perform the erase from the device itself - In Settings, go to General, and select Reset; then, select "Erase All Content and Settings". It may take a while, but it is a secure way to erase the device.