Performing prosociality in public presents a paradox: only by doing so can people demonstrate their virtue and also influence others through their example, yet observers may derogate actors’ behavior as mere “virtue signaling.” Here we investigate the role of observability of actors’ behavior as one reason that people engage in such “virtue discounting.” Further, we investigate observers’ motivational inferences as a mechanism of this effect, using the comparison of generosity and fairness as a case study among virtues. Across 14 studies (7 preregistered, total N=9,360), we show that public actors are perceived as less virtuous than private actors, and that this effect is stronger for generosity compared to fairness (i.e., differential virtue discounting). Exploratory factor analysis suggests that three types of motives—principled, reputation-signaling, and norm-signaling—affect virtue discounting. Using structural equation modeling, we show that observability’s effect on actors’ trait virtue ratings is largely explained by inferences that actors have less principled motivations. Further, we leverage experimental evidence to provide stronger causal evidence of these effects. We discuss theoretical and practical implications of our findings, as well as future directions for research on the social perception of virtue.