Do we severely punish him?
No. You may wish to read
A Parent's Guide to Gifted Children.
Do we put him in gymnastics like he wants?
Yes. He needs to see himself as successful. He also needs to have his sense of control affirmed: work hard, see positive results.
Do we keep fighting the school?
You may wish to look into positive approaches to advocacy. There are many threads and resources on this topic, including
this post. Has the school expressed what they believe to be the root cause of his low performance? Is there a possible learning disability?
My dd in 1st grade is at 100% in all classes and her teacher just emailed me about her taking the gifted test and for some reason that scares the daylights out of me.
Yes, that is a frequent parental reaction. Still, it is better to know than to not know. Theoretically, LOG would imply a different approach be taken as gifted kids tend to have different educational needs.
Do we put ds in a non gifted class?
No, as this might tend to lead to more repetition and an even slower pace.