Whether anyone agrees or not, the drinking age is 21, not 17. This young person was 17 and in HS, well under the legal age and under the custody of his parents. I believe OP did the correct and responsible thing. Just because the law is not necessarily followed does not mean a blind eye should be turned toward it and that there aren’t serious consequences for the person caught in possession of it. There ARE prosecutions for folks in possession of fake IDs as it IS illegal.
If I was the parent of this young man, I’d be grateful if a kind stranger returned my child’s wallet and let me know if they found a fake ID on the top of it with the real ID buried underneath. It would then be something I could discuss with my spouse and child. I would not destroy or confiscate someone else’s property (fake license) or involve the school as I don’t really see this as a school matter.